Kenon Holdings Ltd (KEN) 2017 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Kenon Holdings Ltd. Conference Call to discuss the Fourth Quarter and Full Year 2017 Results of Kenon. (Operator Instructions)

As a reminder, this conference is being recorded. Kenon published its press release with Q4 and full year results on April 2, 2018. If you have not received it, please call GK Investor and Public Relations. The press release as well as a summary of financial information of Kenon, OPC, and Qoros have been publicly submitted to the Securities and Exchange Commission on Form 6-K.

Kenon also published our annual report on Form 20-F for the year ended December 31, 2017. These documents can be accessed from the SEC's website and have been filed with the Tel Aviv Stock Exchange and are available on the company's website.

I would now like to turn the call over to Mr. Kenny Green of GK Investor and Public Relations. Mr. Green, would you like to begin?

Hello. Thank you, operator. Welcome to Kenon Holdings' discussion of its fourth quarter and full year 2017 results.

I would like to welcome all of you to the conference call and thank Kenon Holdings management for hosting this call.

With us on the call today are the management of Kenon and OPC Energy. This includes Mr. Barak Cohen, Co-CEO of Kenon; Mr. Robert Rosen, co-CEO of Kenon; Mr. Mark Hasson, CFO of Kenon; and Mr. Giora Almogy, CEO of OPC.

Barak will first summarize the key highlights of the quarter followed by Rob who will provide an update on the Qoros Transactions. Giora will then provide an update on OPC. Mark will then discuss the financial results of Kenon, and we will then open the call for the question-and-answer session.

Before we start, I'd like to point out that this conference call may contain forward-looking statements including statements regarding expected events, developments or the expected performance of the company and its subsidiaries and associated companies including those statements identified as forward-looking in our fourth quarter 2017 results release and annual report on Form 20-F.

These statements are only estimates or plans and there is no guarantee that they will, in fact, occur. Actual events or results may differ materially from those projected including as a result of changing market trends as well as other risks and uncertainties identified in the Risk Factors section of the company's annual report on Form 20-F filed with the Securities and Exchange Commission and in the section entitled Caution Concerning Forward-Looking Statements in the earnings release.

In addition, this conference call contains certain non-IFRS measures including OPC's EBITDA numbers. For the definition of such terms and a reconciliation to the most directly comparable IFRS measure, please see Exhibit 99.2 to the Form 6-K furnished to the SEC on April 2, 2018. Exhibit 99.2 is available on the SEC website as well as Kenon's website.

And with that, I'd now like to hand the call over to Barak. Barak, please go ahead.

Thank you, Kenny. I'd like to welcome all of you, and thank you for joining us today for the investor conference call summarizing the event in Kenon's fourth quarter and the full year 2017. We published our results last week, and we decided to have the conference call today due to various holidays to allow all our investors an opportunity to join the call. I would like to note that we also published our annual report on the Form 20-F for 2017 yesterday, which is available on Kenon's website.

On this call, we will provide some of the key highlights and financial results and discuss some of the recent business developments in OPC and Qoros. I would like to welcome Giora Almogy, CEO of OPC, who joined us on this call.

To start, I want to reiterate that Kenon is highly committed to its strategy to unlock and realize the value within its businesses for its shareholders. In 2017 and early 2018, we executed several key strategic transactions in line with this strategy, that unlocked significant shareholder value and distributed also a significant dividend to our shareholders.

In 2017, we took a significant step under this strategy with the sale of our power assets in Latin America and the Caribbean by Inkia Energy. And we followed that, as mentioned, with the significant cash distribution to our shareholders. Inkia's Latin America and Caribbean businesses were sold for approximately $1.3 billion to I Squared Capital, a private equity firm. And that proceeds to Kenon after the return of certain debt, taxes, expenses amounted to $635 million, this is also included the debt to Israel Corporation. We received an additional $175 million in the form of 4-year deferred payment obligation. A few weeks ago, we shared the reward with the sale as mentioned with the distribution of a dividend of $665 million or $12.35 per share.

Going to Qoros. The Qoros investment transaction that we first announced on -- in Q2 '17 is another significant step under our strategy. In January 2018, we announced that the New Qoros Investor and equity related to the Baoneng group completed the transaction to purchase 51% of Qoros from Kenon and Chery for RMB 3.3 billion or USD 526 million. This is part of a total investment of RMB 6.6 billion, which is slightly more than $1 billion.

In Q1 2018, the New Qoros Investor completed the transfer of all of the investment fund totaling RMB 6.6 billion or slightly again over $1 billion. In addition, the investor assumed a portion of its proportionate Qoros debt-related guarantees, and as a result, Kenon received approximately $18 million from Chery. According to the investment agreement, Kenon has the right to cause the New Qoros Investor to purchase up to all of its remaining equity interest in Qoros, following the equity injection for -- up to a total of RMB 3.12 billion, which is approximately $0.5 billion -- slightly less than $0.5 billion. The transaction also entails the repayment of Kenon's existing shareholder loans in total amount of RMB 944 million or approximately $150 million.

As a result of the transaction, Kenon is expected to recognize a significant gain on dilution in financial statements in the first half of 2018. The new investor brings significant value to Qoros. Already in Q1 2018, Qoros sold 11,400 cars, which is over 3x the 3,700 cars that were sold in the first quarter 2017. A substantial number of these sales reflect purchase order introduced by the New Qoros Investor. Rob will provide additional detail on this transaction shortly.

Going to OPC. OPC successfully completed an initial public offering and listing on the Tel Aviv Stock Exchange in August 2017. OPC is progressing with a construction of its key project, Hadera, a 148-megawatt co-generation power plant. And also in 2018, OPC completed the acquisition of Tzomet, a 396-megawatt [conventional] power plant project, which is currently under the development. Giora will provide more details on OPC business development in few minutes.

That ends my introduction, and I would like to hand the call over to Rob for more details on the Qoros transaction. Rob, please go ahead.

Thank you, Barak. As Barak mentioned, in January 2018, we announced that the New Qoros Investor, an entity related to the Baoneng group, had completed a transaction to purchase 51% of Qoros from both us and Chery for RMB 3.315 billion, which is about USD 530 million. This is part of a total investment of RMB 6.63 billion, which is slightly more than $1 billion, of which all funds, except for about $20 million will ultimately be reinvested in Qoros' equity. As a result, as of today, Kenon now has a 24% stake in Qoros, and Chery has a 25% stake in Qoros.

I will now discuss some of the highlights, though you can find further details in our press release we issued last week; our press release issued on January 8, earlier this year; as well as in our annual report on Form 20-F which we filed yesterday with the SEC, and as mentioned, which is available on our website.

Kenon received cash proceeds of RMB 1.6 billion or about $270 million for the sale of our equity. And Chery received cash proceeds of RMB 1.62 billion or about $260 million for the sale of its equity. And the investment agreement provides that following the sale of the equity, all of Qoros' shareholders, including the New Qoros Investor, will proportionately reinvest RMB 6.5 billion in total in Qoros' equity, based on their post-investment proportionate equity ownership. The New Qoros Investor has paid its share of RMB 3.315 billion directly to Qoros, and as a result, all funds from the new investor totaling this amount to slightly more than $1 billion have now been paid by the New Qoros Investor.

The investment agreement provides for Kenon and Chery to use the proceeds they received from their sale of Qoros interest to fund their portions of the investment, and therefore, to reiterate there will not be any use of new money for our respective investments into Qoros.

Kenon is required to invest, specifically, RMB 1.56 billion in Qoros. As a result, we have retained about RMB 130 million or about USD 20 million from these proceeds. And this was used for a partial repayment of our back-to-back loan to Ansonia, our major shareholder under the terms of our loan agreement, leaving a loan balance to Ansonia of about USD 55 million. In addition, the investment agreement also provides for repayment of existing shareholder loans owing from Qoros in the principal amount of RMB 944 million to each of Kenon and Chery in 2 equal tranches.

In terms of our guarantee obligations, as part of the investment, the New Qoros Investor will assume its pro rata share of the guarantees and equity pledges, including covering a portion of those previously provided by Kenon based on its equity ownership in Qoros. The New Qoros Investor has already assumed its proportion obligations with respect to a portion of Qoros' loan facilities. And as a result, in January 2018, as Barak mentioned, Chery repaid Kenon about USD 18 million out of a total of RMB 244 million previously advanced, and a significant portion of the Qoros equity pledged by Kenon to Chery has been released.

Regarding our put option. Kenon has a put option for our stake in Qoros. During this 3-year period, beginning from the closing in the investment, we have an option to cause the New Qoros Investor to purchase up to half our remaining 24% equity interest in Qoros for up to about RMB 1.5 billion, which is about USD 250 million. From the third anniversary of the closing, until April 2023, we have a further right to cause the New Qoros Investor to purchase up to all of our remaining equity interest in Qoros for a price of RMB 3.12 billion or about a little less than USD 500 million for the total 24% stake. These prices are subject to future adjustments for inflation.

And now I would like to hand over to Giora, CEO of OPC Energy, who will now provide an update of his business.

Thank you, Rob. So as Barak mentioned before, I start with the -- little bit about the business development. In terms of our main construction project OPC-Hadera, it's a 148-megawatt co-generation project in Hadera, Israel. Total cost of this project is approximately NIS 1 billion or I would say approximately $288 million. As of the end of the year, end of '17, we have invested to date $162 million and the project is approximately 83% in completion. We expect, as scheduled, to commence commercial operation in the first half of 2019.

Furthermore, on Tzomet, it's a 396-megawatt open-cycle project. We signed in April of 2017 an option agreement to acquire 95% of the shares of Tzomet. And in March 2018, we completed the acquisition, and we are now holding 95% of Tzomet. The total consideration for the acquisition of Tzomet is approximately $23 million, that's the acquisition of the shares based on milestones until completion. Furthermore, to bring this project to the stage of financial closing, we expect to be -- to invest up to $14 million to bring the project to a position that we can reach financial closing. So we're still at the development stage.

In the end of the year, end of '17, OPC Energy or through OPC-Rotem and OPC-Hadera, we signed a gas purchase agreement with Energean, developing the Karish, Tanin offshore fields for a period of 15 years or until the date of the consumption of the full contractual quantity. We expect -- or based on the estimations of Energean, we expect the field to commence commercial operation in 2021. Furthermore, we are talking about approximately 50% of the total quantities of gas for Rotem and Hadera, since we have a long-term contract with [Tomal], and we have the right to shift up to 50% to a new gas supplier.

In terms of financial results, we finished 2017 with the EBITDA -- a raise in EBITDA from $67 million in 2016 increased to $86 million in 2017. The main causes for the increase are higher volume of sales, higher prices and lower gas cost as a result of a lower exchange rate in 2017.

In terms of the business development and the financial results, that's it for me. Mark, you can go ahead.

Thanks, Giora. I will now provide the financial highlights of 2017. You can find additional details in our 6-K, which was filed on April 2, and our 20-F, which was filed yesterday.

Kenon's consolidated results of operations are largely made up of the consolidated results of OPC while the results of IC Power's Latin American and Caribbean businesses are accounted for as discontinued operation. The result of Qoros and ZIM are reflected under results from associates.

Kenon's revenue, which is largely made up of OPC's revenue was $365 million in 2017. This reflects an increase of $41 million compared to the $324 million revenue achieved in 2016. And this was as a result of higher electricity tariffs in 2017 and increased volume of sales to private customers. Kenon achieved an operating profit of $42 million in 2017 compared to an operating loss of $72 million in 2016. Kenon's share in losses of associated companies decreased to $111 million in 2017 compared to $186 million in 2016. The reduction in these losses together with Kenon's increased operating profit contributed to the decrease in Kenon's net loss from continuing operations to $209 million in 2017 compared to $430 million in 2016.

The profit and gain from discontinued operations for 2017 was $478 million, which includes approximately $79 million in income of taxes on discontinued operations and a gain after tax on the sale of Inkia's Latin America and Caribbean businesses of $397 million. The reduction in loss from continuing operations, together with the increased profit and gain from discontinued operations contributed to an increase in net profit attributable to Kenon's shareholders to $237 million in 2017 compared to a net loss of $412 million in 2016.

In terms of liquidity and capital resources. As of December 31, 2017, cash gross debt and net debt at the Kenon holding company level were $62 million, $240 million and $178 million, respectively. In addition, Kenon's consolidated cash at December 31, 2017, includes $1.2 billion in proceeds from the sale of the Inkia businesses. Following repayment of certain debt, taxes and expenses subsequent to year-end, net proceeds from the sale amounts to $635 million.

Kenon expects to receive an additional $175 million deferred proceeds in relation to the sale, at which point Kenon will need to pay an additional $27 million in taxes.

In January 2018, Kenon received total cash proceeds of RMB 1.69 billion or $268 million from the New Qoros Investor, which Kenon will use to fund its requirement -- required investment in Qoros and make loan prepayments to Ansonia. In January 2018, Kenon used $20 million of these proceeds towards partial repayment of loan to Ansonia. In January 2018, Kenon also received approximately $18 million from Chery, as Rob mentioned earlier.

Finally, in March 2018, Kenon made a cash distribution, sharing some of the proceeds of our activities with our shareholders to realize value in their shareholding of Kenon. The cash distribution amounted to $665 million or $12.35 per share.

That ends our summary, and we will now be happy to take your questions. Operator?

(Operator Instructions) Our first question is from [Dagita Gosteva] of EG Capital.

I just wanted to touch base with you about ZIM Shipping. Do you currently consider any strategic options in regards to your stake in ZIM Shipping given their overall container ship market is strong enough right now and the company reports historically high margin? And if you consider, what options are the most viable in your view? IPO? Strategic investors? And finally, when?

Yes. Well -- our stake in ZIM is 32%. So we are -- basically, you're right that the margin are better this year. And we can say that the company, first of all, itself are considering their option. And you rightly mentioned that these are -- that they have a few possibilities. So there is the potential development within ZIM level. And we -- as we are doing with the rest of the portfolio and our strategy, our focus on supporting our companies to materialize their value and also considering various types of transactions.

So right now there is nothing specific that we can update. But we can say that naturally if the market conditions will stabilize and continue to be improving, then we would be looking for the right opportunity to basically unlock value and exercise our strategy. But there is no specific update on ZIM.

(Operator Instructions) We have no further questions at this time. Mr. Cohen, would you like to make your concluding statements?

Yes, thank you very much. On behalf of the management of Kenon Holdings, and also Giora, and obviously, I would like to thank you for the interest in our company. If you have any questions, please feel free to contact the IR team and us, whose contact details are on the press release. Thank you again, and farewell from us. Have a good day. Thank you very much.

Thank you. This concludes the Kenon Holdings conference call. Thank you for your participation. You may go ahead and disconnect.