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Edited Transcript of TKFEN.IS earnings conference call or presentation 25-Oct-19 1:30pm GMT

Q3 2019 Tekfen Holding AS Earnings Call

Nov 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Tekfen Holding AS earnings conference call or presentation Friday, October 25, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Hakan Sadik Göral

Tekfen Holding Anonim Sirketi - VP of Agri-Industry Group

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Conference Call Participants

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* Selim Kunter

Deniz Yatirim Menkul Degerler A.S., Research Division - Director & Senior Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to Tekfen 2019 Q3 Results Conference Call.

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Questions and Answers

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Operator [1]

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We will now start with the Q&A session. (Operator Instructions) We have a first question from Selim Kunter from Hacking Business.

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Selim Kunter, Deniz Yatirim Menkul Degerler A.S., Research Division - Director & Senior Analyst [2]

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Well, I've got a few questions. First, the EBITDA margin of the Contracting segment was above company's recent averages in the third quarter. Was there a one-off factor triggering this improvement? Or was it related to booking of previously unrecognized project profits? And if so, could you give color on how much EBITDA was related to profit recognition? And are there any incorporated in your revised guidance?

My second question is going to be on the backlog outlook. I believe all the investors are expecting new contract awards. Since in the absence of new additions, the backlog will turn to $1.2 billion level at the end of the year. So you will most probably refrain from providing detailed information, but it will be very useful if you could just comment on the backlog outlook a bit more. And are there any developments related to the pending projects? And lastly, I believe it is too early to talk about this, but what is your expectations on the recently announced public [road] plan project?

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Hakan Sadik Göral, Tekfen Holding Anonim Sirketi - VP of Agri-Industry Group [3]

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Okay. Thank you for the question. It's Hakan from Contracting segment. The EBITDA margin is a little bit higher than expected before. I mean, the budget of EBITDA margin, because we already -- actually, on the first quarter, we had a non-diluted profit from one of the projects that's near to the end. That was a claim -- claiming count. And this -- in the last quarters, we'll have the -- a normal EBITDA margin like budget as before. That's why this will affect the last quarters of Contracting segment.

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Operator [4]

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We haven't any question for the moment. (Operator Instructions)

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Hakan Sadik Göral, Tekfen Holding Anonim Sirketi - VP of Agri-Industry Group [5]

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For the second question regarding with the backlog outlook. This is the Hong Kong Contracting segment. As you said, this quarter, the backlog value is around TKR 1.8 billion. And by the end of year, it will be less than this amount, of course. However, compared to the previous year, a number of tenders that we submitted is increased. This is what I can say. And we are expecting some new contracts in the future. But as you said, we refrain ourselves to mention about the contract amount. But we are optimistic. We are optimistic. We do expect some new contracts in the near future.

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Selim Kunter, Deniz Yatirim Menkul Degerler A.S., Research Division - Director & Senior Analyst [6]

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Just to follow up on this. Are you -- have you changed the target markets for the backlog for new projects? Or are you still concentrated on the same countries that you've been getting projects so far?

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Hakan Sadik Göral, Tekfen Holding Anonim Sirketi - VP of Agri-Industry Group [7]

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Thank you for the follow-up question. First of all, we track -- we are trying to maintain our currency, let's say, market share in the current countries. As you know, [7] countries we have operations, right, at the moment. But of course, as per the company's, let's say, target, we would like to enter some new markets in different countries as well. We are submitting some bids in the African countries, in Russia and for other neighboring countries and some South European countries, Balkan countries as well.

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Selim Kunter, Deniz Yatirim Menkul Degerler A.S., Research Division - Director & Senior Analyst [8]

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Well, I was just -- yes, I was just asking if there were any developments related to the [family] projects.

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Hakan Sadik Göral, Tekfen Holding Anonim Sirketi - VP of Agri-Industry Group [9]

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Not standing, but you had mentioned the polypropylene project.

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Selim Kunter, Deniz Yatirim Menkul Degerler A.S., Research Division - Director & Senior Analyst [10]

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No, actually the gas tank project. But that is currently out of the backlog.

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Hakan Sadik Göral, Tekfen Holding Anonim Sirketi - VP of Agri-Industry Group [11]

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[Floran] project you mean?

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Selim Kunter, Deniz Yatirim Menkul Degerler A.S., Research Division - Director & Senior Analyst [12]

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[Floran] project, yes.

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Unidentified Company Representative, [13]

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This is (inaudible). What we know from the client is that their efforts to get financing for the project is ongoing. And they were very optimistic to get multinational contribution to the project. Of course, it depends upon the speed in getting those. What we can say at that moment is under this because we are obliged for their speed and their success in getting the financing. In this respect, there is nothing more that we can say.

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Operator [14]

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(Operator Instructions) We have a next question from [Rivet Emilie] from HBC.

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Unidentified Analyst, [15]

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Your year-end guidance for the Contracting segment implies a pickup in revenues for the fourth quarter for the Contracting segment. Does it have to do with anything like one-offs from previous quarters? A collection, you're waiting because since you haven't had any new contribution in the last 6 months or so. I mean, a pickup in revenues, I can't understand the reason. Just quarterly seasonality of the whole business? Or do you expect some one-off again in the fourth quarter? But also, you have, I think, lower margin guidance for the fourth quarter. So I'm pretty much confused about that.

And secondly, for the other segment, the year-end guidance for the term loan EBITDA is quite high because you have around TKR 50 million -- sorry, EUR TKR 40 million, I think, in the 9 months, and you expect EUR 95 million in the full year. So it implies around EUR 50 million EBITDA for the fourth quarter only.

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Hakan Sadik Göral, Tekfen Holding Anonim Sirketi - VP of Agri-Industry Group [16]

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Regarding its contracting last quarter expected revenue. Thank you for the question. At the beginning of this year, we have made some assumptions while preparing this expense. Some of projects will be better performing. I mean, the physical progress will be better than expected. Therefore, the fourth quarter revenues will be higher. That was the reason. And you are right. Thank you.

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Unidentified Company Representative, [17]

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So it's (inaudible) from (inaudible) group. Thank you for the question. You had a question about the profitability of the terminal business in the fourth quarter. It is basically related with the type of the business that we do in the terminal business. As you might do over that, you do the handling of dry bulk and storage, temporary storage of them as well as handling and temporary storage of liquid loss from a seasonal point of view, as the biggest portion of the dry bulk that we handle and temporary storages, the store is whole. From a seasonal point of view, we expect all handing and probably temporary loading of [coals] and hence, this is why we were more optimistic in the fourth quarter when compared with the rest of the year.

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Unidentified Analyst, [18]

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I have a follow-up for the fertilizer segment. Can you explain this -- the developments in the export side? Last year, you had a very successful quarter in terms of exports. Why isn't such a performance applicable in each quarter? Is it because you have capacity constraint and you want to sell in the domestic market? Or the opportunity here just don't arise, that's why?

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Unidentified Company Representative, [19]

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Thank you for the follow-up question. In terms of cumulative year-to-date volumes, actually we are performing better than last year. In terms of the first 9 months, last year, we were at 223,000 tons. We are now at [273,000] tons. It's a question that is replicable or not. But if I give you some insight into fertilizers, global fertilizer industry, it's a fact that there's a contrary demand and startup problem, mainly cost because in some regions, mainly in the space by India because of excessive rains, the supply of construction has been less than last year's. This has caused a bit of an excess in the global balances. And this has caused us in the third quarter to export less phosphate based fertilizers than we used to. As said, there's a temporary demand and supply problem. We expect it to recover by the beginning of first quarter of 2020.

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Operator [20]

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We have the next question from (inaudible).

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Unidentified Analyst, [21]

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I have 2 questions. The first one is regarding the memorandum of SOCAR and Tekfen to construct a new production facility. My question is, have you reached any conclusion within this 5-month period? The second one is about the medium arbitration issue. The latest announcements, which was 1 year ago, it was that the hearings was to take place in May 2019, but we didn't get any announcement from you. What is the latest status? And the third one is about the organomineral supplier clouds? The strategy said that the second bonds investments, which will be started within this month. I wonder what is the latest status on this issue.

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Unidentified Company Representative, [22]

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This is (inaudible) from Tekfen Holding. As far as the memorandum of understanding between Tekfen and SOCAR is concerned for the urea ammonia plant is concerned, we have made a previous investigation whether we could get the Azeri gas transported through (inaudible) rather than investing the facility in Azerbaijan, investing it in Turkey, where we will have gas and we have the market. Unfortunately, this didn't reveal feasible. So what we are doing now is we are nearing to the end of the feasibility study of the urea plant in Sumgayit.

In Azerbaijan, we -- I believe we will have the first results in mid of -- at the end of November. And if it reveals that it is feasible, then we will have the go decision and then initiate the activities. The second question...

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Unidentified Analyst, [23]

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As far as the legal arbitration.

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Unidentified Company Representative, [24]

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As far as the rebuild is concerned, as you know, we have -- we won the first round of the arbitration. We -- in order to be able to -- and of course, the implementation of this decision and get our receivables that the arbitrators have decided, we tried to enforce it in another court in Switzerland. This was not possible under that result. Nevertheless, that we have the right, and that it has to be paid by the Libyan as the first arbitration sales was decided is still there. And apart from this, we -- as you probably know, we have another arbitration that is ongoing, which, unfortunately, because of the passing away of one of the arbitrators is EBIT. Longer -- it took longer time than [we wished]. We are depending on the arbitrator's decision, which we would be optimistic in getting our results at latest in first quarter of next year.

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Hakan Sadik Göral, Tekfen Holding Anonim Sirketi - VP of Agri-Industry Group [25]

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It's Hakan again from Agri group. I would (inaudible) are concerned. If I may give you a bit of a background in -- for our other project is going to be a 6-megawatt biogas electricity production together we just filled 5,000 tons of all the mineral production facility. We are approaching the project through multiple efforts. As some part of the efforts, we are preparing all the engineering documentation agreement and everything. On the other part, since the critical path for this project is being able to chase up the so-called (inaudible) tariffs, the government incentivized tariffs for biogas to electricity production. We are reaching the ground ready for construction. The construction and the facilities to be in [Mraconia], other plants or land of, it's more than 6,000 square meters. And the cost structure, I would say, literally, has picked up our preparation of the land for construction.

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Operator [26]

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We have the next question from Yara (inaudible) from (inaudible).

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Unidentified Analyst, [27]

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My questions have already been answered.

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Operator [28]

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We have another question from Celine (inaudible) from (inaudible) Investment.

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Unidentified Analyst, [29]

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I was just wondering if you could just give some color on the recently announced polypropylene project. What's your expectations on this investment.

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Unidentified Company Representative, [30]

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This is again (inaudible). The polypropylene project, as you know, is going to be establishing out in Mersin, the land that we own in Mersin to our affiliate Toros. As you probably know, the environmental impact assessment study has been already submitted to the authorities, and we have already got the market study, which we have ordered to IHS. Recently, we have also as our financial advisers, took onboard Ernst & Young. We have a (inaudible) memorandum of understanding with our candidate partners, which will be shareholders, offtakers, raw material suppliers, an American and a Korean company. What we are going -- what we are doing now is to -- with the contribution of all parties to prepare an in-house CapEx, OpEx and to prepare an in-house document that will enable the Board of tax and holding to give a decision of go or no go within the year, if possible. But if not, in the first half of January next year. Should we get the go decision after this in-house studies, we will immediately select the licenses. The offers are already in-house, in our hands. We have made our evaluation but didn't officialize our selection yet, waiting for the go, no go decision to be taken. And we will make once there is the go decision or no go decision, we will make a separate announcement in this respect. However, the first outcome, reveals a positive, gives us a positive impression that we should continue. That's the reason we are continuing to prepare all those preparatory work, to enable our Board to get sound and well-established decision. And as I said, should we get the go decision in January, then we will start to make this content engineering and design study, select licenses and initiate the Ernst & Young will launch the studies with regard to the financial closures, which will have a certain duration, natural duration. Our perception is that we are taking good steps ahead in this project. And as I said, we will most probably make a separate announcement if not by the end of this year, mid of January.

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Unidentified Analyst, [31]

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Okay. That was very useful. And then what kind of IRR are you looking for in this project?

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Unidentified Company Representative, [32]

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I mean, it is very early to give an exact figure, but it is obvious that we are looking 2-digit IRR.

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Operator [33]

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(Operator Instructions) We have another question from Kubilay (inaudible)

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Unidentified Analyst, [34]

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My question about the backlog and the bidding strategy because the -- considering that you lost a lot of project, offtake in construction was 15 months ago, the satellite compressor projects. So -- and on the other side, as you know, is the debt is lower than $108 billion. And my question is, do you think or intend to make changes to your bidding service because 15 months is too much, I think, because we [please] a project. The very long is 6 months, 5 months period we can do. But now, it's 15 months. That's why I'm asking. Maybe we need a change on your bidding service.

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Unidentified Company Representative, [35]

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Let me make a -- in respect to the correction. You are mentioning as our last order or last contract received, the one that we received in Saudi Arabia. But afterwards, they have received contracts. As you know, our ready affiliate helps them. And we, together with them, received the ACE platform. And there is...

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Unidentified Analyst, [36]

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I know. Did you ask them? That is why I am asking my question for Tekfen.

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Unidentified Company Representative, [37]

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No, no. Our site is, as you know, 40% Tekfen and Tekfen is going to cooperate making -- analyzing the project soon. So this is one. There were 2 contracts -- there are 2 plus. One is repair and maintenance contract. And the other one is the FCC contract. Engineering, while performed by our sister company Tekfen Engineering, and we got the procurement and construction of the same. But on this connection, I would like to add you that, inform you that we are the only Turkish company, that has been invited together with 4 Korean companies to bid to build (inaudible) for recovery units of 3 different refineries of (inaudible), and we are bidding. And those projects need, or 2 projects at (inaudible). Surplus has asked to bring a certain financing, which we are going through -- which we are going to do this through our German affiliates.

As far as the bidding strategy is concerned, I believe we have to look to the problem not -- the problem is not in our bidding strategy. The problem is to the countries that we are bidding. And the question was asked and we have answered. We are not limiting ourselves with the conventional countries or the companies that we are currently working in bidding, but we have now the holidays this month. A lot of domain and interest in geographies and bidding in South European countries, our current country. And even we did to Norway. We are bidding to Poland and Russia and Africa countries. So we -- as you know, we're contracting and being probably one of the certain Turkish contractors that is in stock exchange, the issue is really sensitive. We can only tell you in which countries, in which projects we have interest and we are bidding, unfortunately. Still we are sure that we can finance concept that could be put into force. We cannot announce anything of our activities. So this is a problem that we are living, but we have to face it. I hope that I answered your question.

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Operator [38]

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We haven't any further questions. [Operator Instructions). We haven't any questions. (Operator Instructions) Sir, we haven't any questions.

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Unidentified Company Representative, [39]

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Okay. Thank you. Then that concludes our call. Thank you for your participation, and I wish you all have a good afternoon and weekend. Thank you.

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Operator [40]

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