Tekfen Holding AS

IST:TKFEN.E

Earnings Call Transcript 2018-Q3

[Operator]

Ladies and gentlemen, welcome to Tekfen 2018 Third Quarter Results Conference Call. And I hand over to your host, Çaglar Gülveren. Sir, please go ahead.

[Çaglar Gülveren, executive]

Good afternoon, ladies and gentlemen. Welcome to Tekfen Holding Third Quarter 2018 call. We released the results yesterday and you have the presentation on our website. You can find the revised guidance upwards. And now we start with the Q&A session as usual. Now I hand over back to the operator.

[Operator]

[Operator Instructions] We have a question from Muneeba Kayani from Morgan Stanley.

[Muneeba Kayani, analyst]

This is Muneeba Kayani from Morgan Stanley. You've had very strong margins this year, then in your guidance, you've raised your margin guidance for this year. It would be good to hear your thoughts for 2019. On the construction side, what sort of margin guidance initially would you give? I know it's still early days, but if you could give some sense of what sort of margins we should expect in 2019 based on your current backlog? And then, secondly, on the fertilizer side, given the increase in fertilizer prices and the weaker lira, what does it mean for your margins in 2019? And do you expect the 15% subsidy to the agricultural cooperatives to continue next year?

[Ahmet Okçular, executive]

Thanks for the question. This is Ahmet from Contracting side. We are studying 2019 budget. It is not very clear to say the margin for the next year right at the moment. But I can say our expectation is about between 7%, 8%. Thank you.

[Hakan Göral, executive]

And it's Hakan for the fertilizers. The recent hike in the fertilizer prices gave a shrinkage in the domestic market. And then for -- and then you mentioned 15% subsidy, that actually was not at least for the 15%, that was a price reduction that has been announced by a cooperative. But very recently, there was increase for the fertilizer subsidy of wheat. But that was only an increase from TRY 4 to TRY 8. And as far as 2019 is concerned, we believe that domestic market at least for the first 2 quarters would be poor. But we also believe that given our penetration to the export markets, we will be able to compensate that shrinkage by export markets. So the capacity utilization won't change drastically.

[Muneeba Kayani, analyst]

Can I follow up please? On the construction side, you mentioned 7% to 8% margin. If you could just help me understand why you would think margin next year would be lower than 2018? Are you being conservative? Or is there a specific reason? And then on the fertilizer side, if you can please help me understand, so from -- the weakness that you are expecting next year in the domestic market, is mainly volume thing which you can offset with exports? And so what does it mean from kind of a profitability perspective?

[Ahmet Okçular, executive]

For the Contracting side, I can say that some of the projects, as you know, is backloaded, some of them is front-loaded. There is the impact of it and there is not too much contiguous seeds to beat the conservative for 2019. That is what we are expecting because each and every project cannot be -- cannot have the same margin because the market is getting very tough and we are playing in accordance with the market conditions. Thank you.

[Hakan Göral, executive]

Hakan for fertilizers. Yes, that was meant to be a reduction in the volumes at least for the first 2 quarters and for the last quarter of 2018. All the expectations for the last quarter of 2018 has been reflected into our guidance. So it's already in the calculations. And as far as your question about the impact on profitability is concerned, that very much depends on how inflation is catching up with evaluation. Our experience shows that there's usually kind of a delay of inflation to catch up the evaluation, like 3 to 6 months. And since our estimate for 2018 is already reflected into our guidance, I would assume either a null effect or a very marginal effect for 2019 prices. But as said, that very much depends on how inflation catches up with the evaluation because then -- only then we are able to reflect cost impact into our prices.

[Operator]

Our next question is from Kerem Tezcan from Citi Bank -- Citigroup.

[Kerem Tezcan, analyst]

Actually my questions are already asked. Let me -- I have just follow-up questions. First of all, when I look at the total CapEx that is made, especially in the Contracting business, that has roughly remain below the historical averages. Should we expect that amount of CapEx going forward for the Contracting side? And also this is true for the Agri-Industry segment as well? So CapEx for both segments is my first question. And second question is for the fertilizer segment, you said that a part of that potential drop in domestic volumes might be offset by exports. What is your export target this year? And if you think that -- if you believe that the domestic demand will fall in volumes, how much more do you think you will increase your export volumes in 2019?

[Ahmet Okçular, executive]

Thanks for the question. For Contracting side, we do not expect a big cap investment for the equipment 2019, but it depends on the project that we are bidding plus the requirement of the specific project, the investment is made. We are studying on the budget of 2019. And based on the end of the year, it might be some necessity to renew our equipment and the decision will be made about December end or beginning of January and the reflection will -- and the result will be reflected in budget 2019.

[Hakan Göral, executive]

So for the fertilizers, as far as the maintenance investments are concerned, I would say, it's just -- actually they're not that much below what they were a year ago. But in essence, there are ongoing investments that has not 100% reflected to balance shift is probably why it looks to you kind of on the low side. But otherwise, as far as new investments that would generate new turnover -- or new CapEx is concerned, they would come along with all feasibility. And for the time being, I wouldn't tell that there is kind of big investments that we have already agreed. And as far as your question about export volumes are concerned, we believe that we will be in the range of 400,000 tons for 2018. I would assume and is probably the realization for 2019, again, 400,000 tons, 450,000 tons. We believe that the breakdown of domestic and export volumes would probably be quite alike in 2019 to 2018 because the big drop has already taken place following the August devaluation. Now the markets are kind of in a healing mode.

[Kerem Tezcan, analyst]

Okay. One follow-up question regarding the Contracting segment. As we approach the year-end, we might be seeing that the construction -- total construction backlog might remain below $3 billion if there is no new project additions from today to December. How comfortable are you for maintaining $3 billion of backlog in the next 2 to 3 years? That was your initial guidance in the previous calls and meetings with the management overall. I just wanted to ask what's your view on that?

[Ahmet Okçular, executive]

We are comfortable, but not 100%. Of course, there is always ups and downs in the contracting work because when you bid it, your expectation might be very high, but sometimes that expectation is broken by kamikaze. And -- but more or less $3 billion we're going to make it or slightly less, slightly up, but not just $3 billion.

[Operator]

Our next question is from [ Kuflei Aksalam ] from individual investor.

[Unknown Attendee]

I have a couple of questions about the exchange rate of the fourth quarter, the estimated average exchange rate, because the third one -- third quarter one is TRY 5.99. The other question is, on the commitment chapter, the Page 30, there is a big difference between the third quarter figures and the second quarter figures on the given pages because the second quarter Turkish figure is TRY 10 million, but the third one is TRY 18 million. Where is the difference coming from is my question. The third one is what is the latest ratio of the international arbitration changes? This is the third one. And the fourth one is there is a new company, the joint venture with T Engineering. What is the aim of this new company? This is my questions.

[Ahmet Okçular, executive]

So for the footnote #15 on Page 30 of the report, this is seventh company guarantee given for the Contracting projects. And it's all -- the difference comes all from the exchange rate difference, actually it's the translation impact after the devaluation of Turkish lira. And for the exchange rate question, I couldn't get the exact question you are asking. Can you please...

[Unknown Attendee]

What is the estimated exchange rate, that's my question, for the fourth quarter? Normally, your estimated...

[Ahmet Okçular, executive]

Okay, it's -- okay, we -- for budgeting purposes, we take it flat. Whatever the realized exchange rate for the 3-month, 6-month or 9-month period is, for the rest of the year, we take it flat. Because we don't know the direction of the exchange rate, it's very difficult to forecast.

[Unknown Attendee]

That means -- that means in the figures -- financial figures, the TRY 5.99 is taken. This value is flat, right?

[Ahmet Okçular, executive]

TRY 5.99 is the closing rate, but the average rate is TRY 4.95. So this is the average for P&L. Yes. So for 12 -- full 12 months, we take average rate as TRY 4.95. And for balance sheet items, it's almost TRY 6.

[Unknown Attendee]

And the third question is about Libya and T Engineering.

[Ahmet Okçular, executive]

The Libya, as you know, we have 2 court case in Libya. One of the result is expected this year. For the second one, the court decided to make the last hearing May next year. There is a bit postponed from this year to next year and hoping to get result, the second one, in next year. For the T Engineering, it's just a corporation for the project. There is no impact of that corporation for the -- to the project. Thank you.

[Operator]

[Operator Instructions] We have a question from Mr. [ Murat ] from HSBC.

[Unknown Analyst]

You said that effective exchange rate assumption for the fourth quarter is around TRY 5 per dollar. That means with revised revenue expectation for the Contracting segment, it leaves around $580 million of revenue recognition for the fourth quarter, $580 million to $600 million. This is a substantial increase both in quarter-on-quarter terms and year-on-year terms? And looking at aging of the backlog, why should we expect such a jump in the quarterly revenue recognition? That's my first question. And the second question is for the fertilizer side, what's sort of average price you have for the export business?

[Hakan Göral, executive]

So we start with fertilizers -- I mean, fertilizers are, in essence, commodities, and we sell our product according to the established price levels in the global market. I would assume that you don't expect me to tell you the prices grade by grade, but these are according to global commodity prices.

[Unknown Analyst]

I don't expect product-by-product prices, but you shared an average blended domestic price. So I thought maybe you would also provide export blended price. If that's too much to ask, okay, I don't ask my question then.

[Operator]

[Operator Instructions] We have a question from Selim Kunter from Deniz Invest.

[Selim Kunter, analyst]

I have a quick question. In 2017, when there was a conflict in the region, you had refrained from booking the profits of Qatar's Al Khor investment project until the issue had been resolved. Are there any unrecognized profits to be booked in the future? Or have you booked all the profits from that project so far?

[Ahmet Okçular, executive]

Thanks for the question. No, there is no any unexpected profit for the future projects. Because now for the Al Khor project, we are above 60% in progress. And more or less, everything is clear for us and there is no contingency remaining.

[Operator]

We have no other questions at this time. [Operator Instructions] We have a follow-up question from Mr. [ Murat ] of HSBC.

[Unknown Analyst]

Sorry to bother you again. I had a question about the Contracting segment. I could not get the answer of.

[Ahmet Okçular, executive]

Sorry there were some other questions after you, and could you repeat it? What was your question?

[Unknown Analyst]

With the current assumption -- you said that the assumption for fourth quarter is around TRY 5 per dollar. So with updated year-end revenue guidance of the Contracting segment, that leaves around $580 million to $600 million of revenue recognition in the fourth quarter. Do you expect some sort of one-off collection from existing projects, why? I could not understand why there is such a jump in quarter revenue recognition looking at backlog aging schedule.

[Ahmet Okçular, executive]

Let me answer that way. The last quarter, if you ask, revenue increased. As I tried to explain early in this conference call, some of the projects are backloaded, some of the projects are front-loaded. There is some impact of that. Due to having the big project and having lots of details at the very beginning of the project and the progress is not made as we are expected. Right at the moment, all the obstructs for the project, especially the Al Khor, is at the -- is in the past, and we are making much more progress and progress -- progress improvement and the reflection of that is the income and the revenue is getting higher than the previous quarter. Thank you.

[Unknown Analyst]

And a follow-up question about the fertilizers, once again, the Agri margin in the third quarter is exceptionally high around 23% as far as I can see. Can you explain and elaborate on the dynamics behind such expansion in the EBITDA margin given the weakness in the domestic market? Particularly in September, I assume there was weakness. So I would -- the previous question, I could not get the answer of that because export prices are probably lower than the -- blended export prices are probably lower due to the product mix. That's why I was curious. I mean, how such large margins could be made? That was the reason of my question.

[Ahmet Okçular, executive]

So if I start by trying to answer your previous question, that, as you said, that's a mix issue. For the -- for domestic market, we have a certain mix that gives us an average price that is comparable. But as soon as the export business is concerned, sometimes it's pure nitrate, sometimes it's pure phosphate. So comparison wouldn't be apples-to-apples. If it's more nitrate, then the average price is lower. If the content of the phosphate is increasing, the average price increases accordingly. So that was the general comment to your previous question. And as far as your third question is concerned, I will say, we made extensive volume of exports for the quarter [ 130,000 tons, 135,000 tons ]. And naturally, from a timing point of view, that was August and September where the exchange rates were in favor of the export business. So we enjoyed higher exchange rates, that increased our competitiveness naturally.

[Unknown Analyst]

Lower cost levels and higher Turkish lira prices basically, right? Like a financial effect.

[Ahmet Okçular, executive]

Yes.

[Operator]

[Operator Instructions] We have no other questions. Dear speakers, back to you for the conclusion.

[Çaglar Gülveren, executive]

Okay. That concludes our call. Thank you for joining us today. And have a nice day and weekend.

[Operator]

This concludes today's conference call. Thank you all for your participation. You may now disconnect.