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Tekfen Holding AS
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Ladies and gentlemen, welcome to Tekfen 2020 Third Quarter Results Conference Call. I now hand over to Çaglar Gülveren. Sir, please go ahead.
Thank you, Mary. Welcome to Tekfen Holding Third Quarter Results Call. We have top management joining us today to answer any of your questions.
And now, we are ready to take the first question. Now back to you, Mary.
[Operator Instructions]
The first question comes from Selim Kunter from AK Investment.
I have 2 questions, if I may. The first one is going to be about the approximately TRY 300 million contracting loss. Can you provide some detail on this? Is this a one-off loss or a cost overrun? Which project -- it is related to our projects. And whether this is -- this has a potential to be recovered through claims in the future.
And the second question is going to be on your cash position. I see that it came off from around $500 million mark in March to a tad above $100 million in just 6 months. And I understand that there is the dividend payment and the amount you paid for the acquisition of the remaining stake of so-called petrochemical plant. But at the same time, I'm seeing that your receivables from landing works is on the uptrend. And it raises the question whether there's a collection challenge here. And if so, which project or project it's related to? And -- well, linked to this, where would you expect your cash position to end the year?
Hi, this is [ Daman ] from Contracting. Regarding your first question about the loss, it is a one time. And some of them due to -- not some of them, almost all of them due to COVID because projects are running. But COVID effect is not being recognized by the client yet. We are negotiating. And we have some additional requests, if we want to call it clean. And till the end of the year, some of them, we hope will be finalized. Some of them may shift to the 2021 first quarter.
And could you give the detail as to the amount of this one-off loss? I mean, if this wasn't recognized during the third quarter, where would your EBITDA margin be in the contracting line?
Now it's almost 0. But if that effect was not realized, our expectation was about 4% -- between 4% and 5%, 4.6%, something like that.
Okay.
So it's the difference between the realized loss.
Okay. And on the cash position?
For the project collections, you had a question, I guess.
Yes. Actually, it was just about the cash position. It's coming from $500 million to $100 million in just 6 months. So I was just curious whether this is a collection problem? And if so, how much would be recognized in the future?
So of course, it has a breakdown of different reasons. First of all, I mean, since the end of 2019, as you said, it's down from $500-plus million to almost $100 million. And there is a $100 million payment for the SOCAR Polymer acquisition, some dividend payments of around $65 million and some on investments in -- around renewable energy and similar type of investments. And the remaining amount will be actually project kind of -- project financing. And it's on the balance sheet now as a collection item from the clients.
Well, if the things goes as we expect, when our additional requests, which you may call the [ plate ], realized in last quarter then our cash position will be better. It's affected directly.
Okay. So the $260 million increase in the receivables from ongoing works is not related to one particular project. Is that correct?
Yes.
Yes.
You're right, you're right.
And Next question comes from [ Rova Ukars ] from Integral.
My name is [Rova Ukars] from Integral. I have 2 questions in total. First of all, do you anticipate the recent discoveries of natural gas in the Black Sea to result in new contracts for you in terms of pipelines? And the second -- my second question is that you actually have announced a remarkable increase in your agricultural and chemical growth sales. Would you anticipate this to go on at this pace? If not, why?
Regarding the gas -- Black Sea gas recovery, we are very closely following, and we are posting declines and related to this, and it might be a potential future project for us. And this study, the homework is being made accordingly.
Okay. And on the agricultural and chemical products?
Yes, it's Hakan. If I may answer your second question. First of all, I would like to underline the fact that in line or -- with the pandemic, the importance of food and access to food has accelerated. This is actually individual, has borne a high demand for the fertilizers, not only in domestic market, but as well in the exports market. So as reported with our financials, we were able to increase both our export sales and domestic sales.
For the time being, we see the continuation of the demand. And this is actually why you can't see the same growing pattern in our year-end forecast. I would say, yes.
So I think I can -- I think that we can anticipate this to grow linearly as it did in this quarter, I believe?
Yes. That's how we are feeling. How we are seeing it in the market for the time being.
Next question comes from [ Gusiver Karim ].
I have 2 questions. When you look at -- when I look at your backlog on the contracting side, I see that there is an amount remaining -- there is an amount of $363 million remaining in Saudi Arabia. And we read some statement that there's an unofficial workup for Turkish products and we hear rumors that there are some unofficial workups for Turkish contracting businesses as well. How do you see the prospect of these 5 projects in Saudi Arabia? How do you see the prospect of their completion, especially I'm talking about Al Khor Expressway because that's the one which has only 1% completion percentage. It's my first question.
And my second question is when I look at your total backlog, let's say, when I look at some past 8 years, the average backlog amount was always, on average, $2.5 billion, and the company is currently $1 billion below that. What kind of business development activities are you doing at the moment in which geographies? Are you optimistic about increasing the total backlog amount?
If I may reply first question -- starting from the first question. Right at the moment, what we are hearing and reading from the news and hearing from the market that unofficial boycott has not been affected the construction contract yet because we are not buying the material and equipment. But the problem over there is a lack of payment that we are facing. This is not only for the Turkish contractor. This is almost for all the contractors due to COVID reducing the budget. And the other project, which you mentioned, Al Khor, it is not in Saudi Arabia. It is in Qatar. It does not affect. And then thirdly, if we come to backlog, yes, it was about $2 billion plus our expectation, and we may not able to reach it. This is again the COVID effect because we know some of the projects, we are in a short list in a good position to be awarded.
Unfortunately, authorities have not been making the decision yet because the second wave, third wave, whatever you call, COVID -- that -- everybody is very -- stepping very carefully and watching their budgets. But how we can recover that right at the moment, in our organization, the busiest departments are business development and the tendering department. There are too many pipe -- projects in the pipeline, but it may not be realized this year. Everybody is getting credit themselves for the 2021. I can't make the general comment for the contracting group. Year 2020 is loss year for us. Not only for the Turkish contractors, almost for the all contractor all over the world. Thank you.
Can I have an additional question?
Yes, please go ahead.
Regarding the CFS petrochemical project in nursery, when I look at your cash position and the current lack of profit on the contracting businesses, can we assume that this project is also going to be great because presumably it has a high CapEx amount?
This is [indiscernible] responding. That investments are delayed has nothing to do with our backlog, but it has to do with the general economical situation in Turkey and in the world. So we are prudent, and we are looking when we will have a clear economical picture, that will encourage us to continue with the investments. So in this sense, we are going to limit our activities as far as the projects that you have mentioned with our in-house studies for a certain period of time.
Next question comes from [ Kubilay Akerson ], private investor.
I have several questions. The first one is about Libya. The International Court of Arbitration has at least partially granted our rights for the Libya case. In addition, government has signed a memorandum of understanding to get the rights. And my question is when do you expect the issue to be resolved for Tekfen? And is there any amounts we have agreed with the parties yet?
And the second question is about the tenders. I think you have given a bid for the Qatar North field LNG expansion project. And is it possible for you to give information about this tender? And when the tender will be finalized? And also for the Al Sharq Crossing project, what is the status of this project? Maybe postponed, canceled or still going on? If it is going on, what is the possible time to be finalized?
And the last question is the agricultural production site, last year, we saw a loss at this site. This year seems still same. And where do you expect to make a profit? Or when do you plan to make a profit cash?
Let me answer your first question, you're right. There was an inter-government agreement as far as our receivables are concerned in Libya. We are part of this agreement. As you know, we had 2 cautious court cases for our receivables in Libya, and we have already won. So unfortunately, I cannot say anything with regard to when we can get it. But I know that the agreement has been ratified by both countries and that negotiations are ongoing. We are trying to participate into the negotiations, and we are trying to get it from the clients that we have this receivable because from Libyan -- the government of Libya has instructed each and every different clients to deal with their debt separately.
As far as the North Field expansion project in Qatar is concerned, we have more than 1 tender that we have given. I can classify them in 2 different categories. In Package 2, we are in joint venture with an American company, leading to the Qatar gas and Qatar petroleum. And in Package 1, there are different multinational EPC contractors that have formed joint ventures. We are bidding to them for certain sub packages.
As far as we have been informed, the Package 2 that we are -- we have already bid directly to the client will be finalized by the end of January, they are saying, but let's be prudent and assume that they will be awarding if not delayed in the second time in the first quarter of 2021. And the other packages will be most probably within the first half of 2021.
As far as Al Sharq is concerned, as you probably know, nearly a year ago, it was actually 23rd of December last year, that they have announced the short distance business book [indiscernible], and we were one of these systems. There were 6 or 7 groups. However, in March, just before COVID, they have announced that it will be delayed for 8 weeks. We didn't hear afterwards. What we know is that the center that they were envisaging to float but at reduced tenders, now they have come to the conclusion that it should be, as was envisaged previously, an iconic project based on the Tabara Spanish architect design. Howenever, there is no movement. It is most probably archived for the time being and will come to the markets and to the tendering stage at the 2022 World Cup.
So as far as the 3 questions that you have posted, I try to answer. If you have any questions, I can give answers. Otherwise, Mr. Gülveren is going to -- yes, he's going to answer.
Yes. Thank you, [indiscernible]. When coming to agriculture production, we have 2 companies, 1 of -- actually 3 companies. One of them is a joint venture, but is coming for the production for the fresh side of the business. Alanar Fruit is just a new company with newly established orchards, which means that the maturization of the orchards will be 75% or 80% maturized in 2023 and '24.
This year, under COVID-19 conditions, we kept our sites and orchards all operational 100% and have achieved to export more than 30 countries in 5 continents. But it's affected. European customers' behavior has been changing, which means that consumption and the consumption diversity is changing and the competition in Turkey with the low enterprises in the market without any orchards is still improving. So that means that a corporate farmer like Alanar, who will be -- make the point of difference in this era, the driver of the business will be coming from the production, which, since now we are having only 3% of our production from our orchards, 97% is coming from the trade. So the answer to the question, we will be hoping to have positive impact of the business when the production is much right and the investment to be implemented within 3 or 4 years' time.
For Tekfen Agri, which seed business is focused and seed business is profitable, the fourth quarter will be our marketing quarter. The production in the agri side of the business was quite perfect this year. We have good yields in seed production and [indiscernible] production and the other plants. But the fourth quarter will be the quarter, which we will be having our oil seeds sellable and making the profitable numbers to be accounted for the financials. And that's all I can say.
Okay. They may I ask the additional question about agri production. There were growth plans and intentions of cooperation abroad for the foreign companies or foreign producers.
I couldn't understand you, I couldn't understand [indiscernible].
At the past, the -- there were some announcements like the growth plans with the foreign producers like Chile or the other countries like that. What about these plans?
Yes. Yes, we have studied global investment possibilities and opportunities overseas with Kazakhstan, Uzbekistan and Mexican and Peruvian and Chile countries. But according to our strategic plan, there seems no -- nothing quantified to invest overseas yet. So our ongoing business will be implementing within Turkey and Turkey's investments.
Okay. May I ask the last question about the Board. It said that the Board has made a decision anonymously that even Zander's management evaluation and consultancy firm will be hired to entrust the future of the company to a more robust balance sheet and progressive structure. My question is, will this study be finalized or is still going on?
Thank you very much for the question. As you know, companies, including Tekfen, from time to time, in order to get an unbiased and independent opinion about the management at various levels, not only the top management, but the lower management also, our company is competent in this sector. And as far as I remember, 10 years ago, we had made such a study. And this is yet another one updated study from a different company. And what we know is that they are going to give their report by the end of the year to be out of the holding and make most probably certain recommendations. This is it.
Next question comes from [ Manan Guspar ] from [Kona Capital].
So let me ask that can you please clarify the decline in the net cash position quarter-over-quarter in the engineering Contracting segment? What we have seen the billing on the cash flow, but negative TRY 200 million is 1/5 of that portion. And for the remaining TRY 800 million can that be decompose of cash outflow of the segment?
Let me try to answer your questions such a way. This year, almost the existing projects completion here. And some of them advance payment has been repaid this year, and it's not expectation that it will be the negative cash position for some of the projects, plus on top of it, this COVID pandemic affect our cash-in position and some of the clients has not been properly made the pace, and we have slowed down in some of the projects, but cash out was still, in some cases, our obligation and not able to get the cash in and cash -- negative cash out position increased accordingly.
So further understanding, you were not able to collect the revenues primarily. Some of them were already prepaid and some of them are incurred. And [indiscernible] payments and for primarily sort of called working capital management. Can you summarize that?
Let me answer that. If you look at the footnote number 4, there is -- yes, there's a statement where we clarified -- tried to clarify the position that in one of our projects in Saudi or 2 of them together, there is an outstanding almost $130 million of receivable to be collected. That is one reason for the decline of cash. And also, some projects are temporarily stopped. And we had some expenses, of course, to be recovered once we go back to the project and finish it or start to work.
So also in Russia, this is also in the footnotes, there is an outstanding balance. So altogether, plus these losses in the contracting group, are cash loss. That is also another reason for the decline of cash. All in all, of course, it's not a full decomposition or breakdown of the total figures, but I hope that explains your question.
We have a new question from Selim Kunter.
Actually my question has already been answered. I was just going to ask the $128 million progress payments related to Saudi Arabia.
We have a new question from [Kubilay Akasas].
Okay. My question is about the Russian and the Kazakhstan projects. When do we expect these projects start to affect the balance sheet positively? If it's possible, could you please explain as project basis?
For the Kazakhstan, we have already started remobilization and last quarter, we will see the positive effect in our numbers. For Russia, we are progressing but the conditions are very difficult than the expected environment. And right at the moment, we are about 13% progress. And that COVID effect and the environment climate change effect to the project are being discussed by the client. We are hoping that end of the year, conclusion will be made.
For the moment, we have no more questions. [Operator Instructions] The next question comes from Murat Ignebekcili.
I've got a couple of questions. Your statements in the footnotes is clear about Saudi Arabia. And it seems there are 2 major problems in the Contracting segment. One is about receivables, attributed to Saudi Arabia, and second is losses in the existing operations. So can you conclude that these losses in Kazakhstan or Russia, whatever collection problems, are reversible and you expect them to collect them in fourth quarter or we cook them in fourth quarter or first quarters for sure? Or they are completely gone? This is my first question. Let's answer that, then I will continue.
Okay. First of all, our difficulties for the receivables, nothing to do with Kazakhstan and Russia, also in Saudi Arabia. Kazakhstan and Russia due to COVID effects, pandemic, projects were stopped, and we have remobilized beginning of the October time. And we are hoping to recover our receivables within the last quarter of 2020. As for the [indiscernible] peak, you have the Russia one, we are hoping that, as I stated after the completion, 2021 will be the year for the project.
So we should wait for 2021 and you will reclaim those, hopefully. Okay. That's clear. Second, about Saudi Arabia. While we had a balance of $363 million. So I know this is due to the nature of this business to accumulate receivables. It's completely understandable. So how long do you expect the situation to continue? Do you expect this receivable to turn into cash in fourth quarter or first quarter? Do you have any visibility on that? And more importantly, have you stopped operations and you no longer incur expenses? So -- because $363 million is huge. And if you continue working, you continue to make receivables. Is it the case? Or is it come to stop now until you make further collections?
No, we have not completed the stop in Saudi Arabia. But you're right, the receivables will be shifted to 2021, most of them. And we do not see having the receivables in 2021. It may not be the all for the first quarter of 2021. But definitely, overall, payments will be made in 2021.
So we will probably see massive amounts of collections in second quarter or third quarter at some point, you cannot estimate?
Yes. You are right.
And can you clearly confirm that it is not specific to Turkish contractors and about all contractors or all service providers whatever?
The receivable problem is for all contractors, not specifically for the Turkish contract because we are talking with each other.
Okay. Because there's boycott for Turkish stocks and so there's also of negative publish in the media. So I was just curious if it's related to that or something else?
For contracting business, for the Aramco project, I can clearly say that for the whole contractor, not specifically for us.
Okay. Shifting to Al Khor now. Now as of end of third quarter, there is backlog of almost $258 million left and expected end date is end of this year. Should we expect all this to be booked in the fourth quarter or some of it will be reflected in the first quarter of 2021? And this balance, is it -- does to also include the deferred revenues or additional profits from the project? So this remaining amount could have higher margins reasonably? How can you comment on that?
Yes. Let me try that this way. 90% of the receivables is expected to receive 2020 last quarter. It may shifted some portion, 10% or 15% to 2021 first quarter. And the profit of this project, right at the moment, we can say it will stay as we expect it. And if there are some cases, which we are talking with decline may affect a little bit positive on the profit side. But being in the safe side, our profit margin right at the moment is -- will be kept.
Because this is a very large amount of revenues to be incurred in 1 single quarter, assuming you have recognized around $200 million in third quarter only. This is 1 project worth at least $200 million revenues in 1 quarter. That's why I asked. As that contributes significantly to [indiscernible].
Very nice question. Let me try to explain. The Qatar is not like the other countries. During the winter time, it's the best time to work over there. And right at the moment, we are working with full force. And our subcontractors are also working full force. Before due to COVID restrictions, we were not able to work as a full force. And we are working in an extended working hours. And our expectation and the plan is complete because the remaining percentage is about 3%, 4% and easily can be done within 3 months, that percentage. Some of the activities shifted to early 2021 due to nature of the business. But we do not see a big problem to have the -- that amount of receivables in the last quarter.
Right. And -- okay. So finally, about construction, looking at next 3 months' and maybe 6 months' period, what is your expectation for new additions to backlog? Can you provide the guidance for when and what backlog level we will end the year 2020?
I tried to explain the similar questions -- answer to similar questions at the very beginning of our conference call, but let me repeat it. Right at the moment, our busiest departments are business development and the tendering department. Some of the projects that we have tendered already, we know that we are in the short list, but either government or the client authority, whoever is the owner of the project, are not in a position to make decision yet due to budget restriction for -- because of the pandemic. Our hope is big, but we do not know when and which countries, second wave will be hit, and their decision will be changed. We are closely monitoring and following. This is what I can say.
Okay. And final question about your guidance. You have cut back your guidance after third quarters, that was expected. But still, your guidance implies around $300 million net profit less for the fourth quarter. So seeing your comments -- listening to your comments on Construction segment performance in fourth quarter. I think this $300 million is quite achievable, easily achievable. So your guidance is even a bit conservative it seems. Is it fair to say so?
From which direction you are looking? If you sit this side of the table and the replay, your answer may be different. But if I sit in your chair and asking questions, might be different. But answer is, yes, we are quite confident to meet with our expectation.
Next question comes from [Cemal Argar] from Private Financial Advisers.
I want to ask about your chemical company, [indiscernible], which performed quite well compared to its rivals as we are in very alluring drift season for IPOs, initial public offering. Why don't you evaluate [indiscernible] for initial public offering? Yes. This is my first question.
And the second question, are you planning to enter to new markets, other countries for your geographical diversification in your Contracting business, like Africa? You're right, it depends on those countries that have to tighten their investment budgets due to lower energy prices.
So it's Hakan. Thank you for the question. And I'm going to try to answer your first question. As far as a possible IPO for Toros is concerned or not, the answer, for the time being, we don't have any discussions about it. So it's not on the table for the time being.
I'm trying to answer your second question. This is [indiscernible]. Yes, we are interested in other countries that usually we have worked up to now. Indeed, we have offers Mozambique, in Uganda, in Tanzania, Angola, and we are searching also other countries and Eastern European countries to port. So to geographically, not only geographically, but also in having infrastructure projects and superstructure projects also in our portfolio. So as was stated before, tendering department is repairing offers, not only in oil and gas and petrochemicals, but also in the other sectors of construction.
Next question from [indiscernible] from Integral Yatirim.
I have a follow-up question on your potential investments abroad. Do you have any plans for, let's say, what did you discuss? For example, Mexico or Chile, the countries you discussed, can you clarify your sense again on potential investments?
This is regarding the agriculture, I guess?
Yes, yes.
Okay. It's me, I'm not -- for the previous question, I have tried to answer. For time being, we have no plan overseas establishment of purchase or new investments in the countries you have addressed.
We have no more questions by phone. [Operator Instructions]
We have no more further questions. Back to you for the conclusion, speakers.
Thank you, ladies and gentlemen, for your participation to our call. So that concludes our session today. I hope you have a nice day and weekend. And thank you.
Thank you, ladies and gentlemen. This concludes today's conference call. Thank you all for your participation. You may now disconnect.