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Edited Transcript of TKFEN.IS earnings conference call or presentation 24-Feb-17 1:30pm GMT

Thomson Reuters StreetEvents

Q4 2016 Tekfen Holding AS Earnings Call

Feb 24, 2017 (Thomson StreetEvents) -- Edited Transcript of Tekfen Holding AS earnings conference call or presentation Friday, February 24, 2017 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Caglar Gulveren

Tekfen Holding AS - Head of IR

* Ozkan Akyuz

Tekfen Holding AS - Finance & Accounting, Tekfen Construction

* Hakan Goral

Tekfen Holding AS - General Manager, Toros Tarim & Deputy VP, Agri-Industry Group

* Fatih Bahceci

Tekfen Holding AS - VP of Tendering & Planning, Tekfen Construction

* Osman Birgili

Tekfen Holding AS - President, Tekfen Group of Companies

* Ayse Turali

Tekfen Holding AS - Assistant General Manager, Finance & Administration - Tekfen Holding Real Estate Group

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Conference Call Participants

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* Selim Kunter

Deniz Invest - Analyst

* Kerem Tezcan

Citigroup - Analyst

* Athmane Benzerroug

Deutsche Bank - Analyst

* Elvin Akbulut

Yapi Kredi Investment - Analyst

* Onur Marsan

Garanti Securities - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to Tekfen Holding 2016 financial results conference call. I will now hand you over to Mr. Caglar Gulveren. Sir, please go ahead.

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Caglar Gulveren, Tekfen Holding AS - Head of IR [2]

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Thank you. Good afternoon, ladies and gentlemen. Welcome to Tekfen Holding 2016 results call. This is Caglar, Head of IR of Tekfen Holding. Now, we will start with the Q&A session as usual. And I'll hand over back to [Gizem] to take the first question.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Selim Kunter, Deniz Invest.

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Selim Kunter, Deniz Invest - Analyst [2]

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I've got a few questions, a couple of them on the guidance, actually. Looking at your 2016 contracting performance, I see that you have lowered your EBITDA target -- EBITDA margin targets for the year. I'm just curious on why you have -- you are expecting such a low margin. Is there a one-off expectations for the year? Or is it just to be on the conservative side?

My second question is on the fertilizer side. We know that there are some problems in the application of nitrate-based fertilizers. What is your sales volume target in terms of products for the year, which is based on -- which you base your guidance on? And my last question is going to be on the exchange rates expectation of your guidance.

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Ozkan Akyuz, Tekfen Holding AS - Finance & Accounting, Tekfen Construction [3]

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I'm Akyuz from Construction Company. Our 2017 profit margin is a little bit [slower] than 2016 because of the very big project which is in transportation sector. These kinds of projects are a little bit having slightly lower EBITDA margins, and being a very huge project, this leads in total a little lower EBITDA margin in total. And also after some Qatar experiences, we are a little bit conservative on the figures.

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Selim Kunter, Deniz Invest - Analyst [4]

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Just a follow up, should we expect an upside to these figures, maybe?

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Ozkan Akyuz, Tekfen Holding AS - Finance & Accounting, Tekfen Construction [5]

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Maybe after the second quarter when the design process of this new project finishes, we can give some higher figures. But today, I cannot express any margin.

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Hakan Goral, Tekfen Holding AS - General Manager, Toros Tarim & Deputy VP, Agri-Industry Group [6]

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Hakan from the fertilizers. There are practical difficulties when it comes to application of nitrates to the soil, mainly arising because of the need that the agricultural organizations -- Ministry of organizations' people meet -- accompany the [farmers] from those applications are taking place. Last week, there was a second release from the Ministry which allows the local authorities, the village governors, to be good enough when they accompany the farmers when they apply the fertilizers. So the thing seems to be moving.

Apart from that, we as Toros (inaudible) basically because of the ban of the nitrates to move more for the export markets, which seems to be moving for the time being. So all in all, I would refrain from the time being to give a volume for the nitrates, but I can tell you that we still hold our turnover targets for 2017.

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Selim Kunter, Deniz Invest - Analyst [7]

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To follow up on this, what was the progress in the -- so far this year in the two months, or let's say during the last month after the ban got lifted?

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Hakan Goral, Tekfen Holding AS - General Manager, Toros Tarim & Deputy VP, Agri-Industry Group [8]

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The products that we are able to sell as far as nitrates are concerned are lower when we compare with the previous year. And this was actually why last week, there was a second release from the Ministry which allows the local village governors to be good enough for the company. So it's all in all a slower ramp compared with the previous years. With the new release, it might have the practicalities to be overcome. So it is for the time being what I cannot share with you. And the second thing, as told, is the export market. It is moving as well.

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Selim Kunter, Deniz Invest - Analyst [9]

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And the exchange rate assumptions for the budget, I was asking?

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Hakan Goral, Tekfen Holding AS - General Manager, Toros Tarim & Deputy VP, Agri-Industry Group [10]

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Actually it's the year-end rates, which is TRY3.5 per dollar. So we are taking it flat for full year.

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Operator [11]

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Kerem Tezcan, Citigroup.

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Kerem Tezcan, Citigroup - Analyst [12]

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I had pretty much the same questions about the construction EBITDA margin for 2017, which already highlighted. I just wanted to ask, considering that there have been some problems in the nitrogen-based fertilizer sales, you said that it's down on a year-on-year basis. How much down that we are talking about? And the reason that I'm asking this is basically, is there any downside risk to your -- you said that actually, you're basically maintaining your turnover target for 2017 for the fertilizer business, but I'm wondering if this weakness would have any impact on overall performance of the fertilizer segment.

And the second question in terms of fertilizers is that what are those assumptions are based on? Are they based on change in the environment, meaning that bans will be -- will not be there going forward throughout the year or you basically make the assumptions that the bans will prevail onto the end of 2017? Third question will be, what is the reason for this sharp EBITDA margin improvement in the construction segment in fourth quarter of 2016?

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Hakan Goral, Tekfen Holding AS - General Manager, Toros Tarim & Deputy VP, Agri-Industry Group [13]

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Hakan speaking, hello. So if I may start with -- first of all, the ban has been lifted as of January 20. The ban is not literally, but practically, there are difficulties in applying the nitrate-based fertilizers to the soil.

When it comes to the risk assessment, I would at that point refrain from making a point. This is primarily because of the fact that last week, there has been a second release, as I was telling to the previous person, (inaudible) still need to see the progress. This is the reason one. Reason two, there are still an important amount of export offers that we have been making and which are still pending. Third, from a technological point of view, if the farmer is not able to apply nitrate-based fertilizers, and it means that the consumption is moving forward really for the urea or for the ammonium sulfate. We are as well delivering those products to all dealers. So in case, even in the worst case, we are not able to sell nitrate-based fertilizers because of the practicalities, in line with technological needs of the agriculture, we would compensate those with either urea or ammonium sulfate, so they would help. So at that point, we are not making any revisions. It's too early to make a revision on our forecast, on our -- how we see the year.

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Ozkan Akyuz, Tekfen Holding AS - Finance & Accounting, Tekfen Construction [14]

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For the third question, I will say, in the last quarter of 2016, some of our projects in Azerbaijan mainly increased their expected project profits because our income in [mostly] projects are in United States dollars, but some of our costs in Azerbaijan were in Azerbaijan manat, and this leads to a lower cost. And according to related IFRS standards, a part of the increased profit is recorded on the quarter that's recognized. This a little bit increased the fourth quarter profit rate.

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Operator [15]

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Athmane Benzerroug, Deutsche Bank.

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Athmane Benzerroug, Deutsche Bank - Analyst [16]

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First of all, can you just shed some light on the Q1, how the Q1 was for Toros, especially in the context of the ban of nitrate fertilizers?

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Hakan Goral, Tekfen Holding AS - General Manager, Toros Tarim & Deputy VP, Agri-Industry Group [17]

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I think that was already undertaken. If I may summarize it in short, it's for the time being a slow moving machine because the ban has been lifted January 20, and last week, there was a second release to tell those local governors in the villages to take part in the -- in being the eyewitness of the application. And then, I was as well telling that the export business is progressing and we have offers pending, so it's too early to comment on that. All in all, it's for the time being a bit slow in comparison to what it was a year ago, but there are still quite progresses that we are awaiting for.

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Athmane Benzerroug, Deutsche Bank - Analyst [18]

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Why I was asking the question is that your fertilizer target, actually your guidance, seems to position in such context. So I just wanted you to elaborate more on how you are so confident to achieve this growth, I would say, this guidance on the fertilizer, especially when Q1 should be difficult for fertilizer and Q1 being a high season?

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Hakan Goral, Tekfen Holding AS - General Manager, Toros Tarim & Deputy VP, Agri-Industry Group [19]

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I'd like telling that there are still some progresses that we're awaiting for. One is the impact of the last week's release. So it's too early to make a comment on what the impact might be -- would be. And second one, as I was telling, there are export offers (inaudible) in the model for the nitrates. And there are good reasons for some of those offers will be finalized, which is in line with our December export offers. So this is why I was, to certain extent, confident, but I didn't say it's 100%. So it's still (inaudible).

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Athmane Benzerroug, Deutsche Bank - Analyst [20]

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My second question is on the new supply. If you can just shed some light on this, how do you see the supply for your market for (inaudible)?

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Hakan Goral, Tekfen Holding AS - General Manager, Toros Tarim & Deputy VP, Agri-Industry Group [21]

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I didn't get your question, can you repeat that?

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Athmane Benzerroug, Deutsche Bank - Analyst [22]

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I'm talking about (inaudible) new supply additions actually on fertilizer in Turkey. Can you just give us some background or shed some lights with us on how do you see the supply this year?

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Ozkan Akyuz, Tekfen Holding AS - Finance & Accounting, Tekfen Construction [23]

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Are you referring to the (inaudible) investment?

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Athmane Benzerroug, Deutsche Bank - Analyst [24]

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Yes.

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Ozkan Akyuz, Tekfen Holding AS - Finance & Accounting, Tekfen Construction [25]

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I think they have some problems, but we are not of course very much --

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Hakan Goral, Tekfen Holding AS - General Manager, Toros Tarim & Deputy VP, Agri-Industry Group [26]

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I'd say, so far, the impact that we feel is not towards more supply or oversupply of fertilizers. The soil still needs nitrates for the time being and the farmers are in need of nitrates, but because of the practicalities of the current organizational of the nitrates, this is arising some difficulties. Otherwise, we don't feel any hard competition that really puts us in a difficult position, as well as the pricing or what else is concerned.

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Operator [27]

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Selim Kunter, Deniz Invest.

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Selim Kunter, Deniz Invest - Analyst [28]

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It just caught my attention, in the footnotes, I see that you have taken partnership in a company called Toren and another one in Gazdepo with a capital of total TRY84 million. Is this related to the natural gas storage project that is still awaiting? And if so, is there a strategy change to take part in future projects?

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Fatih Bahceci, Tekfen Holding AS - VP of Tendering & Planning, Tekfen Construction [29]

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This is Fatih Bahceci from contracting, responsible for tendering. Actually, the preliminary activities is ongoing at site, and it is expected to commence the work by the third quarter, depending on securing financial arrangements for the project.

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Selim Kunter, Deniz Invest - Analyst [30]

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Okay.

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Operator [31]

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Mr. Kunter, is your question answered?

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Selim Kunter, Deniz Invest - Analyst [32]

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Well, sorry, are you taking part in the project or is this just for preparing the financial needs or just precaution (multiple speakers)?

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Osman Birgili, Tekfen Holding AS - President, Tekfen Group of Companies [33]

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Okay. Let me take the question. This is Osman Birgili, Tekfen Holding. It is two different entities. The construction will be done by Tekfen Construction, and this is what was explained previously, and Holding has taken some shares just to give the holders some advance for that initial activities and for that initial costs. This will be paid back when the financing is in place. I think, (inaudible) the information.

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Operator [34]

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Elvin Akbulut, Yapi Kredi.

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Elvin Akbulut, Yapi Kredi Investment - Analyst [35]

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My question is on your agri sales volume. If I'm not mistaken, you have given a guidance of 1.8 million tons, which is just about what you have sold in 2016. But there was also the pent-up demand that we have seen in the first quarter last year because of VAT issue and now there is a risk of [lower-ish] nitrate sales. You had like [500,000] nitrate-based fertilizer sales last year. So you are able to compensate for potential loss in the domestic market with exports or do you plan to increase other sales to meet your 1.8 million tons of fertilizer sales? This is my first question.

And the second question is related to the agri margin. Is the 2017 guidance driven by mainly the shift in the overall breakdown of the sales, or rather you see a downward pressure in overall global spreads for the agri markets? This is related to the agri business question.

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Hakan Goral, Tekfen Holding AS - General Manager, Toros Tarim & Deputy VP, Agri-Industry Group [36]

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Hakan answering. First of all, the initial thought is still to compensate for this domestic loss or possible domestic loss by the export markets. It's still there, and I was telling it's a moving machine. And as well as the margins are concerned, there are basically a couple of reasons. One is, this falling raw material prices automatically impact pricing of the fertilizers, which in return is an automatic input for -- impacts the absolute profit amount. Second, the shift from domestic markets to export markets might in return bring a slightly lower margin, and we have been a little bit on the conservative side while giving insight about 2017 based on that.

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Elvin Akbulut, Yapi Kredi Investment - Analyst [37]

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As a follow-up, what's the differential between in terms of margins, domestic and exports?

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Hakan Goral, Tekfen Holding AS - General Manager, Toros Tarim & Deputy VP, Agri-Industry Group [38]

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I would refrain giving that, but in short, you would assume that the transportation cost automatically is like a [eroded] cost that automatically takes place.

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Elvin Akbulut, Yapi Kredi Investment - Analyst [39]

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And in terms of the -- do your plan have -- do you have any new investment plans? There used to be a plan to expand the terminals. Do you have any intention for Iran? You have set up a representation office there. Is there any concrete plans that we can see in the short term?

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Hakan Goral, Tekfen Holding AS - General Manager, Toros Tarim & Deputy VP, Agri-Industry Group [40]

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I think what is being expected about Iran is not about Toros. It's a misleading information.

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Fatih Bahceci, Tekfen Holding AS - VP of Tendering & Planning, Tekfen Construction [41]

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Contracting has opened an office there.

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Hakan Goral, Tekfen Holding AS - General Manager, Toros Tarim & Deputy VP, Agri-Industry Group [42]

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As far as the terminal business is concerned, yes, we still have our investment plans on expanding our terminal activities, mainly in Ceyhan, and is (inaudible) Samsun on the table. We will follow up the agenda and kick off the investments when we see there is an appropriate business environment.

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Fatih Bahceci, Tekfen Holding AS - VP of Tendering & Planning, Tekfen Construction [43]

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Okay. Regarding the office in Iran, we have established a branch office there and seeking opportunities for any potential projects.

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Operator [44]

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(Operator Instructions)

Onur Marsan, Garanti.

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Onur Marsan, Garanti Securities - Analyst [45]

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I was cut from the telephone, so I'm not sure if you have answered it or not. I would like to know the pace of the domestic prices because we have seen some decrease easing in the prices. What's the current level, if you can give, I will be very glad.

My second question will be on the real estate business. In the nine months, we have seen a loss-making real estate business, but then it's [TRY90 million] net income, which comes from the -- that's the tax income. And what was the reason should we assume -- what should we assume for year 2017? Will there be any deferred taxes or anything else?

And my third question will be, 2016, you had an enormous addition into our backlog. What should we assume for new backlogs?

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Ayse Turali, Tekfen Holding AS - Assistant General Manager, Finance & Administration - Tekfen Holding Real Estate Group [46]

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Hello, this is Ayse Turali from real estate. I'd like to start with answering your question on the real estate sector. The profit that you're seeing this year in terms of the tax in our sector is (inaudible) deferred tax effect that belongs to the newly acquired transaction we had from our inter-company division, the tax effect of which is recorded for this year, deferred tax income effect. In the following years, we will be seeing net profits that meets EBITDA in our margins because we're on the stage of delivering our projects which are some in the process of finalizing at the end of the 2016.

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Onur Marsan, Garanti Securities - Analyst [47]

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You will be delivering Istanbul HEPs, right?

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Ayse Turali, Tekfen Holding AS - Assistant General Manager, Finance & Administration - Tekfen Holding Real Estate Group [48]

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Yes, we have already started delivering the Istanbul project this quarter 2017.

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Fatih Bahceci, Tekfen Holding AS - VP of Tendering & Planning, Tekfen Construction [49]

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This is Fatih Bahceci from contracting again. Regarding backlog, our target is to maintain the backlog level we've got at the end of the year 2016. If Toren project is realized, it will go over [$4 billion] initially. But in the midterm, depending on the economical and political conditions in our operation area, our target will maintain around $3 billion to $3.5 billion in the midterm.

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Hakan Goral, Tekfen Holding AS - General Manager, Toros Tarim & Deputy VP, Agri-Industry Group [50]

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It's Hakan from fertilizers. If I may answer your question regarding the average price of fertilizers in the fourth quarter, this is the automatic response of the final product of falling raw material prices. The raw material price has been falling down, so in return, the final product which has been made out of using this raw material has naturally fallen down as well.

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Onur Marsan, Garanti Securities - Analyst [51]

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And what was the situation in January and February? Could you give an average number?

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Hakan Goral, Tekfen Holding AS - General Manager, Toros Tarim & Deputy VP, Agri-Industry Group [52]

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You mean, about the prices?

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Onur Marsan, Garanti Securities - Analyst [53]

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Yes, please.

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Hakan Goral, Tekfen Holding AS - General Manager, Toros Tarim & Deputy VP, Agri-Industry Group [54]

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This has been a bit different. Talking about ammonia price, ammonia prices are on the increase, mainly because of a plant shut down in Ukraine, so they have been increasing as far as the nitrates are concerned. For the first phosphate, it's been, I would say, quite steady, in line with fourth quarter. But for the nitrates, this is ammonia price, which in return have an impact on the prices.

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Operator [55]

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(inaudible), HSBC.

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Unidentified Participant [56]

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As far as I can see, you are quite close to closing the financing of the -- on the underground gas storage project. So is it safe to assume that it's almost a done deal since you have already started allocating workforce for this project? And the second question is from the footnotes, I see that in January, you've received TRY1.5 billion or almost $400 million of advance related to the Al Khor Expressway project. So it seems everything is going fine on that front. How much CapEx do you have to make this year for that particular project in the contracting segment? And thirdly, what is your assumption for unit deliveries in the Esenyurt Project to reach TRY500 million of revenue for 2017?

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Fatih Bahceci, Tekfen Holding AS - VP of Tendering & Planning, Tekfen Construction [57]

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Let's start with the Toren and the Gazdepo project, yes, it is a done deal. We have started, as a matter of fact, some initial engineering works as well and some seismic studies are also being done by our French partners. But still the project for the finalization of the package, financing package, the client expects to receive the good news from the government. As a matter of fact, they need to declare a new tariff for this depot as well. Otherwise, everything is under control and is going on quite well.

On the (technical difficulty), the expectation now is that it will be at least the third quarter so that the project will really start. On the Qatar side, yes, the advance is being cashed. Everything is under control. And the CapEx there is -- since as you would know that in Qatar, we already have our logistics there, so everything is ready. So we do not expect very high CapEx there.

Can you please repeat the question about real estate segment?

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Unidentified Participant [58]

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Yes. Before that, about Qatar, so when we should expect a revenue recognition from Qatar? Beginning from second quarter I suppose partially, right?

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Fatih Bahceci, Tekfen Holding AS - VP of Tendering & Planning, Tekfen Construction [59]

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We're in a very early process of this new project. We still do not have any income recognition. But we, as Tekfen Construction Company, await at least 10% of physical progress before income recognition. This will be most probably in third or fourth quarter of 2017.

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Ozkan Akyuz, Tekfen Holding AS - Finance & Accounting, Tekfen Construction [60]

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This is for the profit recognition. Revenue, we're recognition revenue but not the profit yet. And you also had a question on real estate segment. Can you repeat the question?

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Unidentified Participant [61]

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Sure. In reaching a guidance of TRY500 million revenue for 2017, what is your assumption unit deliveries in the Esenyurt Project?

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Ayse Turali, Tekfen Holding AS - Assistant General Manager, Finance & Administration - Tekfen Holding Real Estate Group [62]

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We are planning on delivering the project almost more than 80% -- 80% to 85% of the project within the year 2017. The rest would be projected to be delivered in the following year.

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Unidentified Participant [63]

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So you've already sold, I think, around 1,000 units in the project out of 1,400. So what's your year-end targets in that?

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Ayse Turali, Tekfen Holding AS - Assistant General Manager, Finance & Administration - Tekfen Holding Real Estate Group [64]

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Well, the year-end target will approximately bring us an additional 300 and something like that units.

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Operator [65]

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(inaudible).

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Unidentified Participant [66]

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My question is about your dividend policy. As I see the company in a net cash position now, would you prefer to increase your dividend payout ratio for the next year? Would you share any guidance about it?

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Osman Birgili, Tekfen Holding AS - President, Tekfen Group of Companies [67]

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Well, actually if you look at our historic payout ratio, except with low profit years, this year, we are paying out more than 30%. It was 30% normally. And depending on this year's profit amount, management may consider paying out a higher amount, but that should be decided next year. So this year, we are paying out 35%. Normally, you would expect 35%, but that's a management decision.

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Operator [68]

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Elvin Akbulut, Yapi Kredi.

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Elvin Akbulut, Yapi Kredi Investment - Analyst [69]

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I have a follow-up regarding your Al Khor project. You said you were recognizing the revenue but not the profit, so that means in the first half of the year, we will see a much lower EBITDA margin from the contracting segment, which will gradually increase starting from the third quarter?

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Ozkan Akyuz, Tekfen Holding AS - Finance & Accounting, Tekfen Construction [70]

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Yes, most probably yes.

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Elvin Akbulut, Yapi Kredi Investment - Analyst [71]

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And second question is related to agri. In the presentation, you stated that agri was negatively affected by the FX volatility. Does that mean that the distributors delayed their purchase decisions based on the volatility or whether you were not able to reflect the TL depreciation directly on the prices, or how I should interpret the statement?

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Ozkan Akyuz, Tekfen Holding AS - Finance & Accounting, Tekfen Construction [72]

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There are various reasons that (inaudible) this statement. But definitely, no bad debts or delayed payments from our [dealer]. It has been under control. But it's a fact that because of the situation, the market has to some extent [shrinked]. Producers have been expecting to see what the final decision of the government vis-a-vis the nitrates is going to be. And then, of course, the raw material prices have been quite volatile. So depending on how the market is moving and depending on how much inventories we are having, pricing the product has always been an issue.

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Operator [73]

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(Operator Instructions)

(inaudible).

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Unidentified Participant [74]

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I think I might have missed, could you repeat your CapEx guidance for both segments please?

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Hakan Goral, Tekfen Holding AS - General Manager, Toros Tarim & Deputy VP, Agri-Industry Group [75]

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Hakan speaking from a fertilizers. As you might know, we have finalized our Samsun project last year, which is up and running as good as it can be. And as far as 2017 is concerned, it's for the time being, as a percent of our turnover, in the range of 3% to 4%.

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Ozkan Akyuz, Tekfen Holding AS - Finance & Accounting, Tekfen Construction [76]

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And over the contracting business, we do not expect any big investments. As Mr. Birgili already said, we have enough machinery and equipment for the road projects in Qatar. That's why maybe a couple of percent will be enough.

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Operator [77]

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(Operator instructions)

We have no other questions at the moment. Mr. Caglar Gulveren, back to you for the conclusion.

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Caglar Gulveren, Tekfen Holding AS - Head of IR [78]

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Well, thank you, and thank you for your participation. Please note that our first quarter results will be released on April 27, and thank you again.

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Operator [79]

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Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect.