Tekfen Holding AS

IST:TKFEN.E

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, welcome to Tekfen 2020 First Quarter Results Conference Call. I will now hand over to Çaglar Gülveren. Please, sir, go ahead.

[Çaglar Gülveren, executive]

Thank you, Olivia, and welcome to Tekfen Holding First Quarter 2020 Results Call. Because of the COVID outbreak, we are all at home and joining through our cell or land lines, so there might be some problems with the sound quality, sorry for the inconvenience in advance. And now we have all top management joining us to answer any of your questions.

Olivia, please take the first question. Thank you.

[Operator]

[Operator Instructions]

The first question comes from Selim Kunter from Ak Investment.

[Selim Kunter, analyst]

I was just wondering what the real cause of the weak contracting margins in the first quarter? And I see that you have already revised down your guidance for the year, but should we expect -- if this cost overrun, should we expect further impact in the coming quarters?

And secondly, if I may, I was wondering if you had any supply or procurement problems during the COVID-19 outbreak.

[Hakan Dündar, executive]

Thank you very much for asking. And COVID-19 effects for this quarter is not as all -- some of the projects were affected due to client's instruction. About total 5 projects has been stopped in different countries together with the Turkey. And the debt -- OpEx has been recorded.

And the top of it in one of our project, which is design and build due to design change of the client requirement and the lately informed and the calculation has been made accordingly. And it seems a loss in that project.

And that one due to existing conditions, which we were expecting to have in some of the projects to be awarded to us has been taken out from our guidance for this year.

It doesn't mean it will not be realized. But for the time being, we have in a safe side to take out those expected projects income and the profit from this year.

COVID-19 effects for the existing running project has not been calculated yet as you appreciated. And the respect -- the effect has not been materialized concretely yet. We will be able to share with you, if there will be further cost effect to our projects, after the June -- after the first half.

And the second question, what you think on the transportation? Yes, for some of the projects, we are feeling the effect of those transportation and the logistics not properly working right at the moment.

But it is on and off basis. It is not able to make the calculation yet because today is off, after 2 days, again, start operation. It is difficult for the time being to make the calculation.

[Operator]

[Operator Instructions]

The next question comes from Atinc Ozkan from Wood & Co.

[Atinc Ozkan, analyst]

Two questions, please. The first one is, can you give us some more granular color, please, given that this is the second quarter on a row your contracting and engineering division is missing its guidance and forcing you to cut your annual guidance. I believe in the last quarter of 2019, you had a $30 million provision regarding a particular project. Was any of the hit on the first quarter, contracting margins was also related to the same project? If yes, can you specify which project?

And my second question is, I haven't seen that, but can you provide us some guidance on your CapEx or investment budgets as part of your overall guidance for full year? You were planning to acquire 10% stake in SOCAR Polymer. Is this still on the agenda? Or is it possible to postpone it to next year given the pressure on your cash flow from the contracting division?

[Hakan Dündar, executive]

For your first question, the guidance has not been able to given for the time being, as I explained previously because the COVID effect has not been clear for us and what will be the effect and what will be the precautions and what will be the compensation to be -- that we will be faced.

Regarding the $32 million, it's not valid anymore yet, but based on the calculation that we are doing right at the moment, as much as possible, maybe we will be putting some of the contingencies for the second quarter of the year.

And if you understand us and appreciate that, I do not want to clear the name of the project for the time being -- name of the project. Thank you very much for the first question.

For the second question, I think Cahit will reply.

[Çaglar Gülveren, executive]

Cahit, we cannot hear you.

[Cahit Oklap, executive]

Sorry. Sorry. This is Cahit Oklap. I would like to answer your second question. As you probably know, we have taken over 10%, 5% plus 5% from 2 different shareholders. And the 5% -- the first shareholder is already affected. Payment has been affected. Since we have signed contracts with regard to this buying of the shares, we are obliged to honor our obligations. So the second 5% will be within this month most probably, and the rest of $50 million will be paid. So $50 million effect is already in our first quarter results.

[Atinc Ozkan, analyst]

And if you could provide some color on the overall investment CapEx budget, excluding the stake acquisition at SOCAR Polymer for the current year, I would be grateful.

[Cahit Oklap, executive]

Now as you probably know, although somebody may ask, but let me just explain you, our second and probably the biggest plan and investing in propane dehydrogenation and polypropylene plant project, which, for the time being, given the uncertainty in the market and the effect -- or the negative impacts of COVID-19 to the local and global economy, we have decided to wait and see how the markets are going to react and whether we could raise enough financing for that project.

As you know, this was a multinational investment we had for internal investors together with us.

But this project is going to be internally worked at, but we are not going to affect or take any action regarding an investment.

So in this respect, this project will have no CapEx, the PP project for the time being, until we see -- we have a clear picture of the situation.

As far as, in general, investments are concerned, we have decided to quit all investments other than those, which are necessary for debottlenecking and for the continuation of our existing plants, plantations, et cetera.

So it will be in that region only, and it will be very modest in this respect.

[Operator]

The next question comes from [ Devos Vidal from PAM ].

[Unknown Analyst]

I just want to get a clarification regarding the contracting segment's titles in the first quarter, maybe you mentioned, but did you mention the project and the amount? And if not, could you give more color regarding the project amount and the reason behind that? And will there be further write-offs for that project? Or for -- I don't know which project is it. This is the first question. And the second question is regarding the new project outlook, I mean, now the backlog is 1.4 and this almost 200 is offset, so almost 1.2. So how should we consider the backlog outlook for the remainder of the year or the next year?

[Hakan Dündar, executive]

Regarding the write-off, yes, it comes from the 2 projects, one of them, the completed one, which the defect and the warranty period cost was more than what we had expected. And we are talking to client management, but there is no expectation to recover. And the second one, as I've talked with you to -- as I explained before, sorry, it's the design and build project. It lately -- commences to client has been calculated once more and debt calculation effect came about beginning of this year and the effect of this quarter, debt write-off.

And we do not expect to further write-off, but I have to put a clarification that it is about more than 70% of the project right at the moment.

And all the design is not always clear, but you know that sometimes client's requirement is out of our control and the additions will be asked to compensate. But nowadays, the client's behavior is very tight due to that COVID-19, everybody is expected -- client and the contractor. This is a question mark for us. And I would like to make a small comment on this further write-off.

And for backlog, yes, everybody is pulled the break and the slow down and make it strategy, brilliant strategy once more in accordance with the existing situation.

But in the meantime, I have to be clear and almost review that right at the moment. In 3 months, altogether as a contracting group, we have been given the -- about 40 -- between 40 and the 50 tenders to the different clients in all over the world and about USD 4 billion altogether tender value. We are -- we never ever lose our hopes. We are following, and we are very keen to get projects in 2020. But meantime, based on the existing conditions to be in the safe side, we withdraw from our guidance of year 2020 with a profit margin of the expected awarded -- to be awarded contract, which is right at the moment, I can't share with you.

[Unknown Analyst]

And I've also seen in Al Khor project, size has increased to 170 in this quarter, is it accounting issue? Or yes, this project has -- the size has increased? Because last quarter, it was -- that number was lower, the backlog?

[Hakan Dündar, executive]

No. The project has not been -- the value of the project has not been increased. It could be the case of the shifting to number that is to think this our expectation and the projected profit of the project.

Our core project is still same, nothing change.

[Unknown Analyst]

No, I know that part. But the backlog as of year-end, the Al Khor project was 6 or...

[Hakan Dündar, executive]

Sorry, I misunderstood. Sorry. Yes, yes. Sorry, I misunderstood. Now I'm with you. Yes, there are some set instructions and the variation orders, the amount of the statements and variation orders effect is a bit above this amount -- that amount.

[Unknown Analyst]

So did you revise the margin of the project because it is coming to the completion? Or will you make the final adjustment at the end of the year? Or...

[Hakan Dündar, executive]

We will make the final adjustment after the second -- first half of the year. Not right about now.

[Unknown Analyst]

The budget is including -- is the budget, including these adjustments? Or will -- there could be some positive or negative surprises?

[Hakan Dündar, executive]

We do not expect any negative surprises. Okay. And the positive surprises will be surprise for you.

[Unknown Analyst]

Okay. Are you sharing the margin at the moment? Is it 10%, if I'm not mistaken?

[Hakan Dündar, executive]

No, it is not -- no, I cannot share because we do not know the COVID effect of this project. We have to make the calculation altogether, pluses and minuses. But what we see right at the moment, our guidance is guidance for that project.

[Operator]

[Operator Instructions] We have a question from [ Kubilay Akerson ], a private investor.

[Unknown Attendee]

Questions, I have 2 questions. First one is about the number of the workers on construction sites. When we look at the previous quarters, the worker numbers, approximately 15,191. And this quarter is a little bit more. My question is, what is the reason? Because the backlog is -- the increasing number of the workers increasing. Is there any reason for this? The second one is about the Russian project. Russian project, but it is less than the beginning. I think we are approximately more than $40 million. What's the reason? These are my questions.

[Çaglar Gülveren, executive]

Hakan, there is no sound, I guess.

[Hakan Dündar, executive]

Now?

[Çaglar Gülveren, executive]

Yes, please.

[Hakan Dündar, executive]

Can you hear me? Okay. Thank you very much for the questions. Let me give the answer for your first question. The reason of the increase of manpower is, as I tried to explain previously, in one of our project design change has increased quantities of the -- some of scope items.

And we had -- we cover -- we have to try to catch the end date of the project for increase of the quantities of some of the activities required additional manpower, and we supply the additional manpower for this project. But can -- could you be kind enough to repeat your second question because I did not get what your request was.

[Unknown Attendee]

Okay. The second question was about the Kharampur gas sites, the Russian project. The volume of the project is less than before. If you look at the previous backlog, we will see difference volume. What is the reason? Because the...

[Hakan Dündar, executive]

Okay. Now I get it. Now I get it. There are 2 things affect this -- the total project value. One of them is the VAT because the first given number included -- was included to VAT.

And the second, as you well know, there are exchange rate changes, parameter for the -- between euro -- sorry, dollar and the ruble. There was a devaluation, and that devaluations effect plus the VAT made that change.

[Unknown Attendee]

Okay. The margin changed or still same for this project?

[Hakan Dündar, executive]

Sorry. The margin of the situation basic -- the margin of this project right now...

[Unknown Attendee]

The margin of the project.

[Hakan Dündar, executive]

Okay, I get it, I get it. The margin has not been changed yet. But as I make a comment for the -- before, for the other projects, operation, which are under the operation with Russian one is included, the COVID-19 effect has not been calculated, will it be or not? That one will be calculated until the end of the first half of the year, minus -- if there will be a minus effect, it will be recorded accordingly. We are not able to give any guidance for this right at the moment -- for the time being.

[Unknown Attendee]

Okay. The last question about the polypropylene investments. Of course, the drive pay explains something. But my question is, if the feasibility reports -- you're okay. You're okay. The board will decide the start of the project. My question is, is the Board of the company is on same side for this project? My question is this.

[Cahit Oklap, executive]

This is Cahit Oklap. I would try to answer your question. Now I don't understand from where you have got this impression that the Board of the company would not be in the same side. It is at the end of today, in Tekfen's culture, in the 65 years, our Board has always taken decisions unanimously. And should the project be found feasible with calculations and the feasibility report shows that it is feasible and should the Board, having seen the financial and economical situation of the world and the appetite of the financing institutions to finance projects of that size in Turkey, of course, at the end of the day, it would be Board's unanimous and sole discretion to say, go or no-go.

But as I said, although the internal investigations, market studies, feasibility studies, license evaluations are going on and will go on, the decision -- the management would present the project to the Board only at the time that management would be -- how should I say, would see that indeed, this project could be financed with -- and there is enough appetite with reasonable financing costs to the project, then we would put the resolution in front of our Board, and they will decide.

[Operator]

[Operator Instructions] There are no further questions in the conference call. I would now give back the floor to our speakers. Thank you.

[Çaglar Gülveren, executive]

Thank you, ladies and gentlemen, for participating in our call. That concludes our call today. And stay home, stay safe. And have a nice day and weekend. Thank you.

[Operator]

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