Edited Transcript of TKFEN.IS earnings conference call or presentation 21-Feb-20 1:30pm GMT

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Osman Reha Yolalan, Tekfen Holding Anonim Sirketi – CFO [3]

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Thank you for the questions. Regarding the Contracting group, let me reply this way. In our projects in the Middle East region, we procured a provisional amount of approximately USD 30 million due to some geopolitical reasons which lead into expansion of time and also cost recognition — recognized cost for the [POs] and the claims is under discussion with the various clients, but in tough manner, the reason the last quarter, Contracting group looks like negative. Thank you.

Regarding the backlog for the Contracting group. Our target is $2.5 billion, but definitely it seems it will be less than that in 2019 due to the delay of the [startup] investment in our work in the region, plus the geopolitical situation. Some of the projects delayed and/or were canceled. But target is about, as I stated, between $2 billion and $2.5 billion. Thank you.

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Selim Kunter, Ak Invest – Analyst [4]

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As far — if I could — backlog end of year target? Or is it the projects that you want to get throughout the year?

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Çaglar Gülveren, Tekfen Holding Anonim Sirketi – IR & Corporate Governance Director [5]

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It is end of year target. It is in between $2 billion, $2.5 billion.

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Unidentified Company Representative, [6]

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This is [Arlene], Strategy and IR Director from [Tekfen]. Our pricing expectations for the fertilizer segment, we have — we are expecting for the prices to remain firm, actually. And we are expecting to see low single-digit increases [throughout] the average in 2020. But especially in this — after the second quarter, we can have slight increases due to the supply changes.

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Selim Kunter, Ak Invest – Analyst [7]

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So you expect some upside to your expectations, I guess.

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Unidentified Company Representative, [8]

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Yes, for 2020. We are expecting, yes, slight, slight increases. But it’s of the low single digits.

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Selim Kunter, Ak Invest – Analyst [9]

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I’m sorry, just to clarify. Are you — do you see an upside to your guidance for the fertilizer expectations or EBITDA figures? Or is it just an upside to the prices — prevailing prices?

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Unidentified Company Representative, [10]

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Against the prevailing prices and in line with our guidance.

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Çaglar Gülveren, Tekfen Holding Anonim Sirketi – IR & Corporate Governance Director [11]

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For the CapEx question, this year’s budget is roughly around $50 million, 5-0, $50 million. And for the investment segment, it’s actually, as I already mentioned, Tekfen Holding, the Tekfen Venture is here also, but it’s kind of a longer-term investments. It is not too long, but 5 to 7 years. So once we exit from these investment ranging between like $2 million to $5 million each, we will see the results.

And also our latest acquisition of 10% of SOCAR Polymer in the Other region, that’s here. Also, it will be paying dividends, hopefully, and contributing to our cash flow.

And some smaller investments we have in Germany in real estate. These are also small investments, like EUR 5 million, EUR 3 million in that range. So for your question, there will be no, kind of, revenue contribution or a margin and profit generated operationally from these investments.

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Operator [12]

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

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Atinc Ozkan, Wood & Company Financial Services, a.s., Research Division – Equity Analyst [13]

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A couple of questions, starting with your guidance on agricultural production. I see that you are targeting an improvement to 12.4% EBITDA margin in ’20, and this segment has produced minus 5% EBITDA margin in ’19. Can you please explain the drivers of this improvement. Is it operating leverage or something else?

And if I may, what is the underlying average exchange rate assumption for this budget? Given that majority of your revenues are in dollars or in dollar-pegged currencies on the Contracting segment.

For the moment, these are my 2 questions.

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Çaglar Gülveren, Tekfen Holding Anonim Sirketi – IR & Corporate Governance Director [14]

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Let me answer your second question first. The assumption is TRY 6.2, the average dollar-Turkish lira exchange rate.

Osman.

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Osman Reha Yolalan, Tekfen Holding Anonim Sirketi – CFO [15]

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To summarize our agricultural production activities, I should actually say, perennial and annual productions, which means Tekfen Agri, as a solo separate entity, is it’s focused on wheat breeding, wheat seeds, banana saplings, [temperature tubers] which in last year’s results — financial results, has improved a lot, quite different between the budget and the actual parameters and results. So Tekfen Agri is quite improving its production with — coming from the experience of molecular building with seeds, with own seeds, and quite doing well.

On the fruit production side, where the orchards are still 3 years old and where the maturization will be achieved by the years of 6 and 7, where we are at 10% of production of the whole determined ideal yield, which is quite low now. And 90% of our agricultural production coming from the freight process, which means that in Turkish agricultural production, we are buying, processing and exporting to 31 countries, to 55 customers.

What we are improving in that business, the acquisition was made approximately 2 years ago. We have organizational changes here, and we have machinery and equipment investments and expansion and our new facilities, which we leased in an ideal locations. And we are consolidating the scattered locations of 4 different packing house into 2 packing houses in Turkey. So with the prices, we will be having a much more accurate differences than we had last year.

And the customers. On the customer side, the sell-in prices and the sell-in quality will be improved by this year. So that’s the main difference and the drivers of the fruit business on the agricultural production side.

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Operator [16]

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(Operator Instructions) The next question comes from Cemal Demirtas from Ata Invest.

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Cemal Demirtas, Ata Invest Co., Research Division – Head of Research [17]

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My question is related to the seasonality, your operations. And maybe in the Contracting side, do you see weaker first half and a stronger second half? Do you see any weakness in the Agri side in the first half or second half? What kind of seasonality should we assume?

And do you see further deterioration in the margins in the first quarter due to, again, the Middle East projects?

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Osman Reha Yolalan, Tekfen Holding Anonim Sirketi – CFO [18]

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Thank you for the question. Actually, we have no seasonality effects on our operations. The only effect, maybe the Ramadan or Ramadan time in some of the countries that we are active. Apart from that, I mean, the — in our Contracting business, there is no seasonality effect. Thank you.

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Cemal Demirtas, Ata Invest Co., Research Division – Head of Research [19]

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Sorry. As a follow-up, it’s related to that question. Maybe there might not be any seasonality, but at least in terms of backlog, are we going to see the higher portion of the business or the project in the second half? Or it’s going to be widespread throughout the year.

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Osman Reha Yolalan, Tekfen Holding Anonim Sirketi – CFO [20]

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Well, I mean, it is directly related with the progress achieved on the — on a specific project. This is related with the progress of the project, actually. I mean it — for the whole year, the project will be making progress as per the schedule. This is what I can say.

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Operator [21]

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(Operator Instructions) The next question comes from [Muharrem] from OYAK Yatirim.

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Unidentified Analyst, [22]

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My question will be regarding the Qatari projects. I mean, how is the progress in those projects? And is there any potential for the cost overruns for those projects for 2020?

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Osman Reha Yolalan, Tekfen Holding Anonim Sirketi – CFO [23]

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Projects are going well. So this year, we are expecting to complete all 3 of them. And in accordance with our calculations, we do not expect any over cost. Thank you.

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Operator [24]

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The next question comes from (inaudible) from private investor.

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Unidentified Participant, [25]

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I have 3 questions. The first one is about the polypropylene investments. My question will be has the Board reached any conclusion about these investments? Because I know the environmental impact assessment is going on. And also, have you got a plan for being a joint venture of this investment? And if this case is happened, then who are the [ethicals]? That’s my question.

The second one is regarding the SOCAR and Tekfen new investments per — or memorandum that we see in the ammonia and urea production facility. This is my question: Is there any news or schedules for this issue?

And the third one is about the company project with Al Sharq Crossing. What do you think about our chance for — to take this project?

And the last one is, of course, for the investors, of course. Do we plan or think to buy back an amount of shares because of latest performance of Tekfen stocks?

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Çaglar Gülveren, Tekfen Holding Anonim Sirketi – IR & Corporate Governance Director [26]

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So for the first question about this polypropylene investment. Since our last announcement, our announcement — of this announcement, we had a conference call, there is no material developments, actually. The progress is slow by nature. And we are still working on the feasibility study of the project, the preliminary engineering, so these are still underway to estimate the CapEx requirements of investment. So in the environmental assessment report, you see some figures, but it’s not final.

And we are talking to the potential propane suppliers for the long-term supply of the feedstock. Also, we are in talks with some global traders for the long-term sales and marketing agreement of these products to be produced.

And you might be also following from the press that we are about to receive the environmental approval for the project. So after all these changes are finalized, we will propose the project to our Board, and the Board will come up with the final investment decision or not. So that’s for your first question.

For the buyback, there is no such decision of the Board. From time to time, it’s being discussed internally. But until now, there is not such decision to make — buy back or to start a buyback program.

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Osman Reha Yolalan, Tekfen Holding Anonim Sirketi – CFO [27]

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For the Sharq Crossing, we are following up. It’s in the tenders stage. What the chance our competitors have in that tender, we have the same chance percentage to be awarded.

Therefore, SOCAR and the Tekfen MOU regarding the ammonia-urea plant, the feasibility study is going on, and the decision will be made accordingly.

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Çaglar Gülveren, Tekfen Holding Anonim Sirketi – IR & Corporate Governance Director [28]

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So you are all answered, or you have multiple questions, maybe?

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Unidentified Participant, [29]

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Yes, I got the answers.

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Operator [30]

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

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Atinc Ozkan, Wood & Company Financial Services, a.s., Research Division – Equity Analyst [31]

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I just had a follow-up on SOCAR Polymer, the 10% minority stake acquisition. Can you remind us the rationale of taking a minority stake in this? And when are we going to see the cash flow, the $100 million payment?

And also related to this, can you verify that what we see in your guidance for the investment segment does not include anything from this? Because it has to be an equity pickup. So any dividend income should be below operating line in that part of the guidance. If you could verify that, it would be very useful.

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Hakan Dündar, Tekfen Holding Anonim Sirketi – Deputy CFO [32]

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This is Hakan, Deputy CFO of Holding. We made these investments for the long-term dividend realization, plus to get some know-how about our potential investments in the region. And we are expecting to be final closing in the first quarter of 2020. And it will be disclosed at the financial investment in our consolidated financial statements.

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Osman Reha Yolalan, Tekfen Holding Anonim Sirketi – CFO [33]

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Çaglar will answer the equity pickup.

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Çaglar Gülveren, Tekfen Holding Anonim Sirketi – IR & Corporate Governance Director [34]

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Let me make a clarification about the cash flow of this investment. It’s not — this $100 million of cash is still on us. It will be finalized in the first quarter.

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Operator [35]

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(Operator Instructions) The next question comes from Murat Bulut from QNB Finansinvest.

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Kutluhan Murat Bulut, QNB Finansinvest, Research Division – Analyst [36]

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My question is regarding your 2020 top line guidance of contracting sites, which is around $1.2 billion, I guess. And is it coming from the ongoing projects only? Or do you include potential contracts that you believe to get in your — in — throughout 2020? Because concerning your current backlog level of $1.7 billion, I find it’s a little bit high.

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Osman Reha Yolalan, Tekfen Holding Anonim Sirketi – CFO [37]

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Regarding the backlog that you have mentioned, $1.2 billion, is related to current projects. Expected ones are not included in that number.

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Çaglar Gülveren, Tekfen Holding Anonim Sirketi – IR & Corporate Governance Director [38]

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(inaudible), $1.2 billion (inaudible) income.

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Osman Reha Yolalan, Tekfen Holding Anonim Sirketi – CFO [39]

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Income, yes. Thank you.

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Operator [40]

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(Operator Instructions) The next question comes from Atinc Ozkan from Wood & Company.

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Atinc Ozkan, Wood & Company Financial Services, a.s., Research Division – Equity Analyst [41]

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My final question, I promise. Can you disclose whether you have received any mobilization or project advance in the latest addition to your backlog, the $5 billion pipeline project with BP and Rosneft?

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Çaglar Gülveren, Tekfen Holding Anonim Sirketi – IR & Corporate Governance Director [42]

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No. There is not — there is nothing to comment.

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Operator [43]

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The next question comes from [Umru Articulan] from HSBC.

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Unidentified Analyst, [44]

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My question will be about Tekfen Tarim. When I’m looking at the fourth quarter EBITDA of the company, I’m seeing that the whole loss at the EBITDA side has been occurred in the fourth quarter. Can you provide any details on this front? And what do you expect about 2020?

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Osman Reha Yolalan, Tekfen Holding Anonim Sirketi – CFO [45]

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Tekfen segments, all in our approach when regarding these 2 separate entities, Tekfen Tarim is operational on the revenue-wise side in second quarter and third quarter. And Alanar Fruits is parallel to this in second quarter and third quarter and a little bit in fourth quarter.

In fourth quarter, Alanar Fruits, where the loss is coming in the consolidation, is basically focused on pomegranate and chestnut business, which we haven’t able to find suitable and viable pomegranates in Turkey to be exported to EU as we have budgeted. So the chestnut operation and pomegranate operation, regarding to the fruits on pomegranate and the process on chestnut side, were not successful indeed.

So what we have done — or we will be having in 2020 is to have more contracted pomegranate farmers. And by the maturization of our own orchards, the pomegranate amounts we are growing will be much more than last year, which we are approximately 95% control on the pesticide and the [fertilizer] side.

The chestnut business is only grown in the village, the villagers are collecting chestnuts. But the process side of the business was not successful this year with our equipment and line. So in Italy, we have some technical experts to have this efficiency to be appropriate for the next year. We will be quite doing well with the process next year with the amounts targeted.

So to summarize, I can all say this. Thank you.

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Operator [46]

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The next question comes from [Muharrem] from OYAK Yatirim.

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Unidentified Analyst, [47]

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Sorry, I missed the beginning of the call. Can you clarify the weakness of the Contract segment’s 4Q margins, 4Q profitability? I mean, the provision related with that?

And my second question will be what is your targets? What is the strategy of the agriculture? I mean, are you looking for further M&As in this particular segment?

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Osman Reha Yolalan, Tekfen Holding Anonim Sirketi – CFO [48]

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Okay. Then for the Contracting segment, this is for the first question, actually. And I repeat the answer. In our projects in Middle East region, we accrued a provisional amount. This is approximately $30 million. This comes from the geopolitical reasons, and these geopolitical reasons leaded (sic) [led] to some expansion of time. Of course, we have some claims about these. These are related to some variation orders also. But all are claimed from the clients. But as these are not signed yet, we didn’t recognize this. But some of those costs are already done and some are waiting to be done. These are written as provision. This make the last quarters to go down. Thank you very much.

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Çaglar Gülveren, Tekfen Holding Anonim Sirketi – IR & Corporate Governance Director [49]

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For the new M&A in the agricultural segments, there is no — for the time being, there is no target, or any specific target for an M&A. But we will be opportunistic, and anything comes up, we might consider and…

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Unidentified Company Representative, [50]

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Depending on the feasibility.

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Çaglar Gülveren, Tekfen Holding Anonim Sirketi – IR & Corporate Governance Director [51]

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Depending on the feasibility of the — and if it’s in line with the group’s strategy, we might consider an M&A in that segment.

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Operator [52]

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Your next question comes from (inaudible) from private investor.

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Unidentified Participant, [53]

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I have 2 questions. The first one is the Tarim [house. A lot to invest]. Have you — have the project related to Tarim (inaudible) crossed the Board been canceled? This is my question.

And if it is canceled, and I know we have some shares, what will be the fate of our company’s partnerships? It’s 2.5%, I think.

And the second one is about the legal arbitration. Yes, we know. We read the announcements from the company. But is it possible, can you clarify the latest status? Will we get the money from the Libya or not? I don’t know now.

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Çaglar Gülveren, Tekfen Holding Anonim Sirketi – IR & Corporate Governance Director [54]

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(inaudible) for the Tarim, your question regarding the plan and — of now several companies. The project is not [salvage]. And the main investor, although we were assured we are only minority with 2.5% in that project, the main shareholder, (inaudible), tried to raise the [parts]. And there is no cancellation, that’s all I can say.

For the arbitration case, if you remember in our announcement, there are some court cases. The first, or the special one, we were able to talk not only as a kind of construction, but for the — as the contractor company in the project, Tekfen’s joint venture with another Turkish construction company. We’re awarded close to the amount of $4 million to $5 million. But for the collection of that money, we are still trying to collect and negotiate actually with the clients.

And for the second court case, they closed the case [to summarize]. And GBP 2.5 million, GBP 2.7 million of expenses of the counterpart will be hopefully deducted from our awarded amounts in the first case.

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Operator [55]

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(Operator Instructions) There are no further questions in the conference call. I will now give back the floor to the speaker. Thank you.

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Çaglar Gülveren, Tekfen Holding Anonim Sirketi – IR & Corporate Governance Director [56]

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Ladies and gentlemen, so that concludes our call. Thank you (inaudible). And I hope you all have a nice afternoon and evening ahead. Thank you very much.

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Operator [57]

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