Tekfen Holding AS

IST:TKFEN.E

Earnings Call Analysis

Earnings Call Transcript 2022-Q1

[Operator]

Ladies and gentlemen, welcome to Tekfen 2022 First Quarter Results Conference Call. I will now hand over to Mr. Çaglar Gülveren. Please go ahead.

[Çaglar Gülveren, executive]

Thank you, Lidia, and welcome to first quarter call -- our call. And we start -- we will start with the Q&A session as usual. And now I hand over back to Lidia to take the first question. Thank you.

[Operator]

Ladies and gentlemen, the Q&A session starts now. [Operator Instructions] The first question comes from Atinc Ozkan from Wood & Company.

[Atinc Ozkan, analyst]

This is Atinc Ozkan from Wood & Company. I have a couple of questions, and I'll start with your engineering and contracting divisions consecutive EBITDA losses. There wasn't much in the presentation, and I would be very happy if you could elaborate furthermore on drivers of the [ hit ] you mentioned $60 million with regarding Aramco pipeline projects. But -- well, are there any other projects instrumentally in this picture? And also, now this is the second quarter that you are reporting such an EBITDA loss for the contracting division. And I do remember you mentioning that you were in talks with your clients for claim collections, yet, we have a very weak result. So what can you say for the rest of the year regarding ongoing talks with your clients including Aramco? And is there really any hope to collect these claims? That's the first question. And I'll ask my second question later.

[Unknown Executive]

This is [ Osman ] from Contracting Group. I'll answer the first question. Yes, this is the only project that generated this loss $60 million came from Saudi Arabia Haradh project because of the duration of the project is a little bit too long, and that's why some cost overruns came. And the other projects are still just as planned. And for the second question, I will let my [ friend ].

[Unknown Executive]

Thank you very much for the question with regard to the claims. As you know, there are many claim files already being processed by the clients, and we are negotiating with the client. Hopefully, we will be achieving some progress on that one. But due to the nature of the claim discussions, it all depends on the client processing and client agreement. And in short, the discussions are still ongoing. Hopefully, we will be achieving some positive results on those claims. Thank you.

[Atinc Ozkan, analyst]

Okay. And my second question is, can we really assume now that your -- remaining part of your backlog is [ clean ] from any cost overruns, execution slippage or any other issues? Because I feel that you are still unable to provide any guidance for the full year, and I suspect that's partly due to E&C division uncertainties in that division.

[Unknown Executive]

Yes, the current backlog is $1.4 billion by the end of first quarter of this year. And of course, free from any, let's say, issues. But the ongoing projects are still -- have some time to -- for the completion during this, let's say, progress of the work, we will be, let's say, sharing all the details on the upcoming quarters with all our partners and investors. Thank you.

[Atinc Ozkan, analyst]

Okay. So regarding your chemical division, what can you say regarding the export ban imposed by the Turkish government, I believe, late last year. Is there any hope that this could be lifted selectively for some products? And in the press release, you mentioned that farmer demand has been delayed. Should we expect some recovery in the second quarter in terms of domestic demand for [ new things ]?

[Hakan Göral, executive]

It's Hakan from Toros. Thank you for the question. I would prefer to start with the second one about rate demand, it very much depending on the evolution of the fertilizer prices. There's still some hope very much depending on how the progress of the rains takes place. That part of the delayed demand can take place if the prices soften a little bit and there is enough rain, if that happens farmers can proceed with purchasing the amounts that they delayed. But nevertheless, it can never be the case that all of the rate amounts will be recovered. So that's -- some part of it is definitely lost. And this is, by the way, not a case that is specific to Turkish market, all around the world because of the high fertilizer prices, the fertilizer affordability index is at its minimums, so all the farmers in the world to the extent that they can delay or they can afford are making their fertilizer purchases. So we will pretty much see how much of this delayed volume is recovered, depending on the fertilizer prices, depending on how the weather conditions proceeds, meaning if it rains or not.

When it comes to export restrictions, of course, it's quite unfair and it doesn't make sense from a point that there's quite unutilized capacity in the domestic market -- in the domestic producers, and some part of this capacity could be utilized in terms of exports if exports are all -- they are permitted. There are rumors in the market because in the northern hemisphere, the time of the use of the nitrates is going to come to an end, namely by the end of May. So from that point, it might make sense also for the Turkish government point of view to allow selectively some parts, some species of fertilizers. We are hearing rumors that if it happens, it would be like how many countries around the globe had deep soft, meaning putting and using export quotas given quote depending on the total capacity of each and every producer so that at any time, they can export part of their capacity. But as said this is more of a rumor. The rumor has taken place also in some foreign fertilizer periodicals. So this is quite a spread rumor, but I wouldn't put it or use it as a solid information before it becomes formal. Thank you.

[Operator]

[Operator Instructions] Your next question comes from [indiscernible].

[Unknown Analyst]

I also have a question on the contracting. I think the Saudi's pipeline project, you already recorded around $100 million provision in the last quarter. And now there is another $60 million during this quarter. And I think up until the 80%, 85% completion, you haven't recognized any loss and now almost there is $150 million loss from the project, around 1/4 of the total project size. So I understand that this delay things has changed the parameters but how much delay are we talking about? And is it just one -- this one reason enough to explain all the losses from the project? Is there anything you can say about causes of losses there?

[Unknown Executive]

This is [ Osman ] from contracting group. Yes, of course, we cannot say that the only reason is the delay of the project. But the main part of this cost overrun is coming from the delays and most of these delays are caused by the clients. I can intend that it's almost 18 months of delay in this project. And this is all derisked by the clients. And also that how many reasons are also in the table. And I cannot tell you the issue, but there is some political issues between Turkey and Saudi Arabia, but I cannot unfortunately give details. These are the main reasons. But for all of these reasons, the -- our cost overrun, we are trying to remunerate our losses and still bargaining with the clients.

[Unknown Analyst]

Yes. Okay. But anyways for the Saudi case, you cannot maybe say that, but it was very obvious that, that's how the government made it very, very difficult for Turkish company businesses to I mean make commercial activities there. So I mean, do you think that this ongoing normalization would help you there? It would help you in terms of gaining claims?

[Unknown Executive]

Thank you very much for the follow-up question. Of course, the declining tensions between the 2 countries and the offers, I think will be much better. And this will be, let's say, probably more projects, and we are going to participate more tenders in that region. The region itself is very demanding, and it's a very huge market for the international contracting companies. If the issues between 2 countries will decline and will stabilize, the potential for the Turkish contractors will increase, and we will be hopefully benefiting from this. And of course, with the good relation the ongoing claim, let's say, discussions will be affected positively. We can say so, hopefully, the issues between 2 countries will be resolved very soon and they will do more jobs in that country. Thank you.

[Unknown Analyst]

Yes. Okay. Also in the contract, I have other questions about this Russian project. According to statements, you get the project in rubles, and it's actually depreciated quite a lot after this Ukraine crises and got back to the normal. But if you assume that we see a further pace of depreciation, further depreciation in the ruble would it be reasonable to assume that you will have to recognize more losses from that project? Also, I mean, as a general question, why did you agree to sign up a project in the ruble terms in the first place?

[Unknown Executive]

Okay. I will answer for the first part of the question. No, because we already finished the project, I mean, we are now demobilizing the project. That's why we do not expect any other -- any losses coming from the FX, foreign exchange. But on the other side if the project is already finished. We do not expect any other kind of cost overruns from that project. While [indiscernible]...

Yes. With regard to the second part of the question, I mean in general practice, we do prefer to go with the hard currency contracts as we do in other regions. But depending on the client expectations or the client commercial terms, if the local currency is preferred during the estimation, we take all the necessary calculations into account, if possible, we make some provisions on our estimations for hedging the potential risk, if any. So this is the general practice, while we are making estimations and if we are successful, during the operation time. Thank you.

[Unknown Analyst]

Okay. I have this question on contracting side. It's -- now your backlog gets a bit smaller and you're just completing around $200 million project per quarter. So what I would like to understand what is the fixed costs in your contracting division? It seems that you have a zero backlog and but maintaining the same operation, how much would you expect to burn cash, let's say?

[Unknown Executive]

Thank you for the question. And with regards to the backlog, I mean, as you know, it is around USD 1.4 billion at the moment. Our fixed cost can be only the headquarters cost which is very less considering the revenue that we are generating over for the last, let's say, years. Other than that, we have no fixed, let's say, cost only headquarters so that's it.

[Unknown Analyst]

Okay. Headquarters plus the capital investments CapEx, do you see some add-ups following this what will we end up with?

[Unknown Executive]

Well, the capital investment -- CapEx investment on a yearly basis is very limited. So only the new equipment investments where necessary, we are doing that. The other CapEx are just for operations or maintenance of the existing equipment.

[Unknown Analyst]

Okay. Also in chemicals now, there is almost 40% decline in the sales volume first quarter but you kept volume guidance unchanged. And also, there is some base impact from this export, but I think it has been imposed on October last year. So I think your volume estimates for the domestic markets, it's not that [Audio Gap] but why do you think that will lead to improvements going forward?

[Hakan Göral, executive]

So it's, Hakan, thank you for the question. Basically, one thing is certain there is quite uncertainty in the Turkish market, that's a fact. The assumption is based on 2 or 3 reasons. First reason, as summer comes to northern hemisphere, our expectation is to see a softening in the natural gas, ammonia and so fertilizer prices. And this would hopefully continue with federal results tightening policy because the inflation would come to a softening point. And the fertilizer prices to get soft or it gets soft with our expectation, then we would expect Turkish farmers who have been delaying using land or [indiscernible] not at all purchasing to use fertilizers for the spring season. This is first reason. Second reason also tied up with this less using -- network using reason is yield in the Turkish agricultural output are coming to a very low level with our expectation. Then we would expect some further subsidies to be implemented by the Turkish government. And third, yes, there's still uncertainty, but in line with my previous explanation, when it comes to softer types being not used in Turkey in the upcoming season. It makes sense for the Turkish government, which needs export and hard currency to soften this limit in the exportation of fertilizers. So this is why we more or less kept our guidance in terms of our volumes of fertilizers soft, but it's not only for the domestic but as well for the export market total. Thank you.

[Unknown Analyst]

I see. And also in terms of the margin outlook as far as I see from your presentation, the ammonia prices are running ahead of -- much ahead of the increase in the fertilizer prices, at least in the domestic market. So do you expect this to lead to margin deterioration from this level? I mean, assuming that there won't be a major FX impact supporting this inventory gain kind of a thing?

[Hakan Göral, executive]

Let me try to answer that as well. Ammonia prices are very high, not only in Turkey, but all around the world. And apart from the price, availability of ammonia is a big issue because of the war between Russia and Ukraine. Some of the terminals are not used, carriers are not accepting to go for a voyage in the Black Sea. And some part of the [ product ] are destroyed, mainly the [ product ] from Tolyatti to use this. So this is a global issue. My expectation for the ammonia prices is in line with our previous explanation, as summer comes to Northern Hemisphere, usage and need -- demand for natural gas is going to decrease. And ammonia is a derivative of natural gas. So in line with demand shrinkage my expectation for ammonia prices is to get softened. Coming back to your question, all these volatilities in the pricing do affect our margins. At the end of the day, we are the biggest manufacturer in Turkey. We are obliged to have some inventories to keep our factories up and running. And sometimes it happens that the inventory is high cost. Sometimes it happens that the inventory is low cost. As a general rule, they never drive volatilities, they tend to affect our profitability. Yes, thank you.

[Unknown Analyst]

Okay. And also in terms of domestic pricing for fertilizers now there is weak demand. Also export has -- is banned. I mean do you see -- or do you see prices in the domestic market is diverging from the global prices, particularly the Europe and the Black Sea region. So is there any divergence of price pressure because of the reasons I mentioned?

[Hakan Göral, executive]

Thank you for the question. It's a valid question. The divergence, as you call it, is a very high one. Indeed, right now Turkey is probably the area whereby the [ first ] part, I think the cheapest fertilizers in the world, with a lead support from the [indiscernible] and this divergence is in the range of 20% to 25% cheaper than the global market. This has been another reason why our margins have declined. Thank you.

[Unknown Analyst]

Okay. But the imports dependency of the sector is quite high, how you still managed to make decent margins with this [ biologics ] or other producers around the world are making -- are much more profitable at the current structure?

[Hakan Göral, executive]

Yes, if you look at the global market, if you look at the market, whereby exports are not restricted, or markets are not under pressure. In a period, there the fertilizer prices have been increasing continuously. You would see that big players like us enjoy higher profits than we do. So in that respect, I would definitely put it very firmly on the table that this exports limitations which has brought in this a high-threat domestic market in terms of profitability of products would definitely be quite higher. Thank you.

[Unknown Analyst]

Okay. I have only one question left. It's about SOCAR Polymer, it's, in the balance sheet it is still 40% value, 40% less than your initial acquisition price of $100 million. I think it's around $60 million currently. And in the last call, I remember that you were seeing some supply issues at SOCAR, and need to assure the auditors in order to sustainability. So that might be a place for an upward revision in the valuation for SOCAR Polymer. I see that this wasn't the case for this quarter? Or what do you think about that in overall?

[Hakan Göral, executive]

I might try to, Hakan again, answer that as well even though it's not 100% under my control. [indiscernible] it's a fact and it's true. Indeed, we have not repeated the valuation study that we have conducted end of 2 years. This valuation study will be renewed if we can do it but we are aiming to do it by end of the 6 months, second quarter. So if there is any change that pops up, it might show that being at least in my opinion as such that, that impact would show itself at a later stage rather than just 6 months time, given the fact that there was problems in the supply of propane and ethylene. So those were the 2 things to sweet stock that were missing and the state-owned company are there [indiscernible] is the supplier and they are making some innovations in their factories, and it's going to take some time naturally for them to keep up and running according to the total need for SOCAR Polymer in terms of propane and ethylene.

[Operator]

[Operator Instructions] There are no further questions. I will now give the floor back to you.

[Çaglar Gülveren, executive]

Thank you, ladies and gentlemen, for joining us today. That concludes our call. I wish you all have a nice Bayram and holiday. Have a nice weekend or day. Thank you.

[Operator]

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